So tell me forum - what effect does a recession have on forex?
Looking back to 2008 shows the USD gaining against most other currencies.
Is this because recession creates risk aversion, and people look for safety in the greenback?
Thanks for your thoughts.
That’s my belief, as well. CoT reports suggest the same thing since non-commercials were quick to jump onto the USD at the start of the recession. Presumably, people will move to whichever currency seems the most stable. Given the USD is the primary reserve currency for both OPEC and the Chinese empire, it makes some sense.
The bottom line is it depends. Yes, risk aversion and flight to quality are factors in the current situation, but that’s been a bit more extreme than most recessions. Keep in mind that forex rates are two-sided measures looking at one currency’s value against another. Whether one currency goes up or down due to a recession could depend on what is happening in the economies of the other currencys.
I think you will find that the dollar is in a bear market but has been rallying a bit during the recent year or so because it is still perceived as the flight to safety currency. It is the world reserve currency at present despite all the poor fundamentals. But it’s not that simple as you have to guage what the investments are in…bonds, gold is also a flight to safety trade, etc.
Look up the dollar index chart and you will see what I mean…
Forex markets are wondering if the overwhelming passage of a revised bailout bill will have any influence on the House when the projected vote takes place Friday. No matter what action the house takes it is sure to make for a wild weekend in global markets including Forex markets. The US dollar currently is higher than 12 of the 16 most traded currencies.
The US also faced bad news from its manufacturing sector with the manufacturing index falling to its lowest level in six years. Weak demand for US products coupled with consumer uneasiness with current economic conditions, higher food and fuel prices, and the future for the manufacturing does not look good. US consumers saw any wage gains made in the past few years disappear limiting consumer spending. This trend is expected to last until at least the end of the year and could result in more job losses. In the US consumer confidence is at its lowest since 2000.
The current credit crisis is starting to spread from Wall Street to “Main Street” with tightening credit, massive home foreclosures, and evidence that the US is headed into a recession. The global economy is fragile at present and in Europe economic activity seems to be collapsing at a faster rate than in the US. It is hoped that the bailout will reinvigorate worldwide credit markets and interbank lending that had frozen up while financial institutions staggered under the weight of failed mortgages.
Central banks have injected billions of dollars to maintain liquidity and have instituted emergency currency exchange programs. Credit is still frozen awaiting action by the US house on the bailout bill. Interbank lending rates continue to rise and reflect an aversion to risk at this time. Many economists are now stating openly that a global recession is in the works.
Although public opposition to the bailout remains political analysts believe the House is more likely to pass the revised version of the bailout bill. In a statement Treasury Secretary Paulson said, “This sends a positive signal that we stand ready to protect the U.S. economy by making sure that Americans have access to the credit that is needed to create jobs and keep businesses going.” Jump starting credit markets is seen as one way to avoid an all out recession. Although the Dollar has been holding its own in Forex markets, long term uncertainty about the future of the US dollar remains. The House vote on Friday is eagerly awaited by Forex investors and traders worldwide. Who knows, it is possible that the bailout will provide Forex opportunities unheard of before the crisis.