The Dollar rises as banking concerns halt risk demand amongst investors

The greenback rose against the euro and the yen as stocks fell on reports banks are struggling to shake off the effects of the financial crisis, damping higher yield demand. “It’s primarily an outcome of risk appetite and equity performance, which is tending to weigh on the euro and support the dollar,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. The dollar will weaken to $1.55 per euro by year end, according to Deutsche Bank AG, the world’s largest currency trader. It previously predicted a decline to $1.50 which was achieved in mid-October. Implied Volatility on major currencies climbed to 14.27 percent, the highest level since July 13, according to data compiled by JPMorgan Chase & Co., indicating traders predict wider price swings in coming months. Higher volatility, a sign of economic uncertainty, undermines the carry trade by making profit from interest-rate differentials less predictable. The EUR/USD is currently trading at $1.4725 as of 19:33pm, GMT and in a bullish trend.

The British pound fell against the dollar on Tuesday after the UK Treasury announced a shake-up of British banks and extended purchases in RBS and Lloyds thus making investors brace for a possible extension of asset purchases by the Bank of England this week. The BoE's policy decision on Thursday remained the key focus for sterling, most analysts expect it will increase its 175 billion pound asset purchasing plan by 25 billion pounds, with some seeing a rise of as much as 50 billion pounds. Investors also digested the potential implications of the banking shake-up, under which Royal Bank of Scotland and Lloyds Banking Group are to get another 31 billion pounds from the government and have agreed to sell key businesses. The GBP/USD is currently trading at $1.6400 as of 20:10pm, GMT with a bearish trend.

The dollar remains vulnerable to the likelihood that the Federal Reserve will repeat its commitment to keep borrowing costs at a record low for an “extended period,” according to Bank of Tokyo-Mitsubishi UFJ Ltd. Rate expectations in the U.S. “suggest growing confidence in the markets that the ‘‘extended period’’ phrase in the Federal Open Market Committee statement will not be tinkered with this week,” Derek Halpenny, European head of global currency research in London, wrote in an e-mailed report today. “The dollar is at the mercy of the FOMC statement released tomorrow and therefore remains vulnerable to ‘‘extended period’’ being maintained.”

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