Equity market moves are considered a barometer of investors' risk appetite and so gains in share prices can bolster demand for carry trades which involve selling low yielding currencies to buy higher yielding currencies and assets despite the risks they bring. This is exactly what is happening now in the market as investors' shift their funds to the euro and sterling pound funded by loans from Japan.
The dollar rose against the euro yesterday after comments from Mr. Trichet suggesting concerns about excessive exchange rate movements. However, today the euro trimmed some of the previous day's losses on the back of carry trades pushing the pair to record a high of 1.5367 and a low of 1.5334.
Given the rapid incline in oil and food prices, there are well concrete concerns that global inflation will continue to rise significantly. This only increases the pressure of the problems that the Bank of England already faces as they contend with mounting downside risks to growth and uncertainty surrounding the financial markets. This dilemma pushes the GBP/USD pair to fluctuate within narrow ranges to record a high of 2.0094 and a low of 2.0046
Speculation that the Feds might lower interest rates from the current 3% before its scheduled meeting on March 18 has also spurred dollar selling. But most of all, a report late last week showing the biggest US jobs losses in five years reinforced expectations for further interest rate cuts by the Feds.
Meanwhile, as we already mentioned above, the yen is losing ground against the greenback as carry trades dominates the market. To elaborate more, the yen dropped as a rally in Asian stocks prompted investors to buy higher yielding assets with loans from Japan. The drop in the yen pushed the pair to the upside to record at this hour a high of 102.17 and a low of 101.44
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