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On Thursday the dollar is still rising after midday in Europe. There are currently two factors that are driving this rise in dollar. One is the fear of a debt default by Dubai World and the other is talk of intervention by the Bank of Japan and suspected intervention by the Swiss National Bank.

Dollar reversed from recent sharp fall

This has reversed the dollar’s recent sharp fall which took it down to a 14-year low against the yen during Asian trading as investors continued to worry about how long U.S. interest rates will stay at low levels.

The dollar had shown a drop also due to the reports that Russia is planning to diversify some of its foreign exchange reserves into the Canadian dollar.

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On Tuesday the euro rise against the dollar, reversing earlier losses as a firmer-than-expected German sentiment survey offset concerns about the country’s banking sector.

Rise in the German Ifo

A bigger-than-expected rise in the German Ifo November business climate index has helped the euro. The index rose to 93.9, a level that has not seen since the collapse of Lehman Brothers last year. This has lifted optimism that Germany’s recovery can gain momentum.

Euro

After falling as low as $1.4889 by 1239 GMT, the euro EUR= was up 0.1% at $1.4975. On Monday it hit a one-week high of $1.5001 but has recently struggled to hold above $1.50.

Traders cited options with a strike price of $1.5000 and $1.5050 which were set to expire later in the day.

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On Friday the dollar rise, giving an extension to the previous day’s gains as investors retreated from riskier assets, taking the shine off higher-yielding currencies such as the Australian dollar.

Tokyo’s Nikkei

Today Tokyo’s Nikkei average fell 0.5% and after the U.S. S&P 500 index suffered its worst one-day percentage fall in three weeks on Thursday, it has logged its first four-week losing streak in over a year. On Friday U.S. futures SPc1 were lower.

Banks parked funds into safe-haven assets

Investors reduced dollar short positions, and as banks parked funds into safe-haven assets such as U.S. government bonds so the greenback was also supported.

Three-month and six-month bills

On Thursday rates on short-dated U.S. government paper has dropped, with the 2-year bond yield falling to the year’s low of 0.68%. It has been said by the traders that the three-month bills traded near 1 basis point and six-month bills fell to near record lows.

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On Wednesday the dollar fell against most major currencies as dealers took profits on the currency’s biggest rise in three weeks, having fresh data doing little to change the view that U.S. interest rates will remain at record lows well into 2010.

Slightly higher-than-expected U.S. inflation

Two reports that has showed slightly higher-than-expected U.S. inflation and a slide in new home construction has aided to cap euro gains below $1.50.

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In New York trading Monday the euro began the week stronger against the dollar, as positive Japanese economic data released overnight reinforced investor confidence in a global economic recovery.

Focus at US Retail Sales

Considering 8:30 a.m. EST release of monthly U.S. retail sales as  another indicator of the sustainability of the turnaround, investors are keeping an eye on it. It is expected that the sales are going to show some improvement.

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On Friday, the week’s dollar sell-off continued, as the greenback hit a fresh 12-month low.

The latest indicator to investors that the worldwide slowdown is drawing to a close is an accelerating economy in China, and they avoided the “safe” dollar in favor of gold, by which an 18-month high level has been hit, as well as other commodities and riskier currencies.

The dollar has fallen quickly throughout the week, and it has dropped nearly to 2 percent against the euro. After earlier hitting a new 2009 high level of $1.4634, on Friday morning, the euro rose to $1.4600 from $1.4585 late Thursday.

Meanwhile,the British pound,  has shown a rise up to $1.6699 from $1.6665, while the dollar fell from 91.74 yen to 90.32 Japanese yen, which is its lowest point since February.

Foreign exchange reserves (also referred to as Forex reserves) in a strict sense are only the foreign currency deposits and bonds that are held by central banks and monetary authorities. However, commonly foreign exchange and gold, SDRs and IMF reserve positions are included in the term in popular usage.

This broader figure is more readily available, but more accurately it is referred to as official international reserves or international reserves. These are assets of the central bank that the central bank holds in different reserve currencies, mostly in the US dollar, and to a lesser extent in the euro, the UK pound, and the Japanese yen, and it is used to back its liabilities, e.g. the local currency issued, and the various bank reserves that are deposited with the central bank, by the government or financial institutions.

History

Official international reserves, that were the means of official international payments, formerly consisted only of gold, and occasionally silver. But under the Bretton Woods system, the US dollar functioned as a reserve currency, so the US dollar also became part of a nation’s official international reserve assets. From 1944-1968, through the Federal Reserve System the US dollar was convertible into gold, but after 1968 only central banks were able to convert dollars into gold from official gold reserves, and after 1973 no individual or institution has the permission to convert US dollars into gold from official gold reserves.

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For the majority of FX trades there is no unified or centrally cleared market , and there is very little cross-border regulation. As the currency market is having the over-the-counter (OTC) nature, there are rather a number of interconnected marketplaces, where the trading of different currencies instruments take place. This shows that rather than having  a single exchange rate there are a number of different rates (prices), and that depends on what bank or market maker is trading, and where the trade is taking place. In practice the rates are often very close, because if this is not done then they could be instantaneously by the arbitrageurs . Due to the fact that the market is dominated by London, a particular currency’s quoted price is usually the London market price.

Although the main trading center is London, but the importance of New York, Tokyo, Hong Kong and Singapore cannot be denied. Throughout the world banks participate. Throughout the day currency trading happens continuously; as there is an end of Asian trading session, the European session begins, that is followed by the North American session and then back to the Asian session, excluding weekends.

Causes of Monetary Flows

Usually actual monetary flows as well as by expectations of changes in monetary flows causes the fluctuations in exchange rates. These monetary flows are usually caused by changes in gross domestic product (GDP) growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often they are released on scheduled dates, so same news have to be accessed by many people at the same time. However, the large banks enjoys an important advantage; and that is they are able to see their customers’ order flow.

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