Forex Blog: Currency Trading News & Analysis.

Archive for August, 2005

Oil makes a splash in forex markets

Aug. 30th 2005

The price of oil is one of the most important variables in the global economy. Traders and investors in capital markets, credit markets, commodity markets, and to a certain extent, forex markets, all incorporate oil prices into their models and strategies. Specifically, as the price of oil has soared, the currencies of resource-rich economies have predictably risen in tandem. The reasoning behind such a trend is as follows: when the price of oil rises, the total value of oil exports rises proportionately. In order to purchase oil from Canadian and Norwegian sources, (whose currencies are thriving), one must first exchange domestic currency for Canadian or Norwegian Currency, which creates demand for those currencies and their exchange rates to appreciate. The Wall Street Journal reports:

Indeed, the close tracking of oil prices and the Canadian dollar has been among the only predictable trends in currency markets in recent weeks as most other major currencies have drifted within ranges, moved more by positioning and technical trading than any fundamental story.

Read More: Oil Price Finds Its Way Into the Currency Markets

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Indonesia to mitigate currency crisis

Aug. 30th 2005

Supported by booming economies, most Southeast Asian currencies have soared in recent years. Indonesia’s currency, the Rupiah, unfortunately has not fared well, declining recently to a 45-month low against the USD. The cause is not economic malaise, but rather the rising price of oil. For whatever reason, Indonesia expends a great deal of effort and money on artificially lowering the cost of fuel, typically by meting out fuel subsidies to consumers and businesses. As the price of oil has risen, so have Indonesian fuel subsidies, which now consume nearly 1/3 of Indonesia’s budget. This has exerted a tremendous strain on Indonesia’s money supply and credit markets, to the point where economists now reckon the Central Bank needs to raise interest rates by 100 basis points (1 percentage point) in order to prevent a full-scale currency crisis. The Financial Times reports:

Should the currency slide further and remain below Rp11,000-12,000 to the dollar for a quarter, they say, it would lead to corporate defaults and put pressure on the banking system.

Read More: Indonesia expected to act as currency slips further

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Posted by Adam Kritzer | in Central Banks, Exotic Currencies | No Comments »

China downplays Yuan revaluation

Aug. 29th 2005

In a recent press release, high-ranking members of China’s Central Bank claim no further revaluations of the Yuan will take place. This time, they may be serious. In previous reports, officials coyly stated they would revalue, without laying out a timetable for such a revaluation. In this latest report, these same officials downplayed the possibility of further Yuan revaluations, saying the forex markets would determine the future value of the Yuan. They quickly added that any sudden appreciation of the Yuan would be mitigated. While it is possible the officials are still being coy, it seems likely that another revaluation is a distant prospect. The Economic Times reports:

“This will be decided by the market. The government will not decide the yuan’s level,” Wu Xiaolin, the central bank vice governor said.

Read More: No further yuan revaluation: China

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Posted by Adam Kritzer | in Central Banks, Chinese Yuan (RMB) | No Comments »

Renewed Faith in Euro

Aug. 26th 2005

Forex markets are arguably the least predictable of all capital markets. Traders and investors must reconcile technical analysis with economic indicators with fundamental considerations, which frequently paint vastly different pictures. This week, it seems forex traders have had a collective change of heart, abandoning the USD and embracing the Euro. Traders bullish on the Euro argue that a host of economic indicators and political developments reveal the EU economy is improving as politicians prepare to enact much-need structural reforms. Additionally, money managers are now touting the Euro as a ‘defensive play,’ due in part to rising natural resource price. The Financial Times reports:

Mounting international confidence in the prospects for the eurozone was neatly encapsulated by portfolio flows data released earlier in the week, which showed the eurozone attracted net inflows into its equity and bond markets.

Read More: Increasing optimism buoys euro

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Posted by Adam Kritzer | in Euro, Investing & Trading | No Comments »

Malaysian forex receipts expected to rise

Aug. 25th 2005

The value of a particular currency should theoretically reflect demand for that currency. Accordingly, diligent forex traders scrutinize trade data and capital flows in order to identify trends in the movement of foreign exchange. Malaysia, for instance, recently announced that it expects tourism to double in the next five years. Because tourism represents one of Malaysia’s largest exports, the country will witness significant inflows of foreign exchange. While this activity should buoy Malaysia’s currency, the Malaysian Central Bank will likely continue to ‘manage’ the Ringgit and prevent it from appreciating too much. The Business Times reports:

The Ministry of Tourism has projected RM59.4 billion in tourist receipts in 2010 from 24.6 million tourists. This compares to RM29.7 billion spent by a total 15.7 million foreign holiday makers in Malaysia last year.

Read More: Malaysia expected to double forex income

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Posted by Adam Kritzer | in Exotic Currencies | No Comments »

China reveals composition of currency basket

Aug. 25th 2005

In a move that was uncharacteristically transparency, China has divulged the composition of the currency basket that is tied to the Yuan. According to senior Chinese officials, the basket is composed of USD, Euros, Japanese Yen, and Korean Won, as well as the currencies of Singapore, Britain, Malaysia, Russia, Australia, Thailand and Canada. While China failed to disclose the exact proportions, it hinted the composition would be trade-weighted, leading economists to speculate the USD would be most important, followed by the Euro and Japanese Yen. The basket’s broad make-up will succeed in minimizing the Yuan’s volatility, for large fluctuations in component currencies will be spread across the entire basket. The Economist reports:

Using a weighted average of China’s trade and FDI, [one economist] guesses that the dollar has a weight of 43%, the yen 18% and the euro 14%. This incorporates a higher dollar weight to reflect the importance of Hong Kong and Taiwan.

Read More: Chinese puzzles

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Posted by Adam Kritzer | in Chinese Yuan (RMB), Investing & Trading | No Comments »

‘RedTower’ deemed most accurate currency forecaster

Aug. 24th 2005

According to Bloomberg news, RedTower, a small Scottish money manager, was the most accurate currency forecaster last year. In a survey conducted among institutional forex traders, RedTower correctly predicted the Euro would fall to $1.22, while the most other analysts forecasted a prolonged period of appreciation. RedTower claims its prediction was largely based on international disparities in the price of beer, proving that inspiration can come from the most unexpected places. In the same survey, however, RedTower managers forecasted the price of oil would not reach $45 by year-end. So much for clairvoyance… Bloomberg news reports:

It was the first time Redtower topped the ranking for currency forecasts, according to Bloomberg data. Bank of Tokyo Mitsubishi, HBOS Plc and Credit Suisse First Boston came second, third and fourth, respectively.

Read More: Winning Dollar Forecaster Gains Insights Drinking Dutch Beer

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Posted by Adam Kritzer | in Euro, Investing & Trading | No Comments »

Ping An diversifies forex reserves

Aug. 24th 2005

When China revalued the Yuan last month, many Chinese conglomerates incurred massive losses on their foreign exchange holdings, which instantaneously depreciated 2% in real terms. Ping An, a large Chinese insurance company, lost nearly 300 Billion RMB, as the majority of its forex reserves were and still are held in USD. As a result, Ping An recently announced it will begin to diversify its reserves, in anticipation of future revaluations. While Ping An’s decision is insignificant, in and of itself, it seems to be part of a broader trend of forex diversification, among both central banks and multinational firms.

Read More: Ping An acts to cut currency risk

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Posted by Adam Kritzer | in Chinese Yuan (RMB), Investing & Trading | No Comments »

Support for Koziumi underscores Yen strength

Aug. 23rd 2005

When Junichiro Koizumi, Prime Minister of Japan, failed to receive the support of the legislature in his bid to privatize Japan Post, he immediately called for a snap election. On September 11, voters must decide whether to grant Koizumi more power in liberalizing Japan’s economy, as well as the authority to trim government spending and public debt. While polls indicate 50% of Japanese currently support Koizumi, many investors are much more bullish, going so far as to price a Koizumi victory into markets. Investors believe the Japanese economy would surely benefit from such a victory, as would the Japanese Yen. Bloomberg News reports:

Demand for the yen may increase on speculation an election win will give Koizumi more power to push through policies to bolster the economy.

Read More: Yen May Gain After Second Poll Shows Koizumi’s Rating Increases

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Posted by Adam Kritzer | in Japanese Yen, Politics & Policy | No Comments »

Euro buoyed by economic data

Aug. 22nd 2005

It seems the dog days of summer have set it. Capital markets are trading sideways, amid a veritable absence of new developments. It is in this climate that the release of European portfolio data is enough to light a spark in currency markets. According to reports, foreigners poured $140 Billion into European capital markets, in June alone. Many traders are confident that these portfolio inflows and the recent strong performance of European equities will provide a floor for the Euro currency. Others are counting on Asian Central Banks to prop up the Euro, by continuing to diversify their vast foreign exchange holdings.

With the eurozone equity market continuing to perform strongly and suggestions that July’s Chinese revaluation may precipitate further reserve diversification into the euro, “global capital flows should be supportive of the euro through the second half of 2005.”

Read More: Euro rallies as portfolio flows jump

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Posted by Adam Kritzer | in Economic Indicators, Euro | No Comments »

Asian currencies unaffected by Yuan revaluation

Aug. 22nd 2005

When China revalued the Yuan by allowing it to appreciate 2% against the USD, experts expected other Asian nations to follow suit. An entire month has passed since the move, however, and the wave of Asian currency revaluations has yet to materialize. Despite promulgating its intentions to allow its national currency to appreciate, Malaysia has actively prevented the ringgit from fluctuating too much. The currencies of India and Thailand have also remained stubbornly locked in pre-revaluation trading levels. Hong Kong authorities have acted similarly, preventing the Hong Kong Dollar from fluctuating outside its tight trading band. Its political and economic relationship with China notwithstanding, Hong Kong has insisted it will not tamper with the HKD’s 21-year peg to the USD. The Economist reports:

Joseph Yam, head of the Hong Kong Monetary Authority (HKMA), the de facto central bank, said on July 21st, the day China moved, that: “No change is needed for the linked exchange-rate system, which has served us well and which we will keep.”

Read More: Follow the leader?

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Posted by Adam Kritzer | in Chinese Yuan (RMB) | No Comments »

Canadian Dollar linked to Oil

Aug. 18th 2005

It seems Canadian exchange rates are highly correlated with the price of oil. This is not surprising, as resource-rich Canada has the second largest proven oil reserves in the world. In short, as oil has soared to record highs, the Canadian Dollar has also risen. At this point, a play on the Canadian Dollar is tantamount to betting the price of oil will continue to surge. A general rise in commodity prices has also made Canadian natural resource companies more profitable and hence, more valuable. Foreign investors have poured money into Canadian resource stocks, some of which may soon be acquired by foreign firms. These investments necessitate foreign currency conversion into Canadian Dollars, which has further boosted the currency. If this were not enough, Canada’s economy is strong, its trade surplus is growing, and its Central Bank may soon raise interest rates. Bloomberg news reports:

“Oil, equities and general U.S. dollar selling” is supporting the Canadian dollar, said a chief foreign-exchange strategist. The Canadian dollar may also benefit from being included in China’s currency basket as investors speculate about “the Chinese putting more of their money into Canada.”

Read More: Canadian Dollar Rises to Highest Since March on Oil-Price Surge

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Posted by Adam Kritzer | in Investing & Trading, Major Currencies | No Comments »

Mixed outlook for Yen

Aug. 18th 2005

The IMF recently released a much-anticipated report on Japan’s economic prospects. The report was overwhelmingly positive, forecasting growth of 1.8%, compared to 2.4% last year. At the moment, inflation appears to be negative, meaning Japan’s Central Bank is not likely to raise interest rates anytime soon. On the political front, Prime Minister Koizumi has failed in his quest to privatize Japan Post, despite drawing wide international praise for his efforts. As a result, Koizumi has called for a snap election to be held in the not-too-distant future. The implications vis-à-vis the Japanese Yen are ambiguous. While Japan’s economic future is bright, its political future is uncertain. Stuff New Zealand reports:

Some directors said intervention could be a last resort if the yen rose high enough to threaten the economy while most others said the economy was in better shape to handle a stronger currency, which can make it tougher for a country’s exporters to compete.

Read More: IMF gives Japan’s economy short-term tick

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Posted by Adam Kritzer | in Investing & Trading, Japanese Yen | No Comments »

Hedge Funds and Asian Currencies

Aug. 16th 2005

Hedge funds previously rode the wave of ‘hot money’ into China, betting that China would further revalue the Yuan in the short-term. According to industry insiders, however, hedge funds may abandon their positions in the Yuan, due to a fundamental lack of profitability. Hedge funds require high returns on their investments, and the 1% interest rates that the Bank of China pays them while they wait for further revaluation has become untenable. It is also becoming more expensive to bet against other Asian currencies, because of higher borrowing costs, which are tied to American interest rates. In short, hedge funds are gradually unraveling their bets on the Yuan; western firms because the best are unprofitable, and Asian firms because they simply don’t believe further revaluations will take place.

Read More: Yuan may not be so lucrative for hedge funds

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Posted by Adam Kritzer | in Chinese Yuan (RMB), Investing & Trading | No Comments »

Currency options gain popularity

Aug. 15th 2005

Derivatives have always been an important part of forex trading. As if 200:1 leverage isn’t enough, many traders enjoy speculating on currencies through the long and short purchases of derivatives (forwards, futures, options, and swaps). Most popular among retail forex traders are currency options, in which one pays for the right to purchase or sell a currency at a fixed exchange rate at some point in the future. In fact, one firm recently introduced a new type of options trading designed in an intuitive way for forex traders. The vehicle is known as a box option and allows traders to graphically select support and resistance levels for a particular currency pair, in the shape of a box. The return depends on if and by how much the theorized levels are actually breached. Business Wire reports:

This is the first and only product of its kind in the financial marketplace. “BoxOption provides…investors with a powerful new derivative for which they can do any number of things, from hedging exchange rate risk and currency positions, to direct investing in the movement of the currency markets.”

Read More: OANDA’s BoxOption Opens a New Era in Currency Options Trading

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Posted by Adam Kritzer | in Investing & Trading | 1 Comment »

Will UK continue to lower rates?

Aug. 12th 2005

Last week, the UK Central Bank voted to lower interest rates for the first time in two years, to 4.5%. Economists and analysts are already mooting the possibility of another decline before year-end, in anticipation of lower-than-expected UK economic growth. Several UK policy makers, however, are reluctant to lower rates any further, lest they incite another housing bubble. Rising home prices have already fuelled excessive borrowing and a proportionate rise in consumer spending. Officials, however, are worried that these spending levels have reached dangerous levels, rising twice as fast as wage growth statistics would seem to imply. The upshot is a very low likelihood of continued rate cuts. The Economist reports:

It is unlikely that Britons are in for a series of interest-rate cuts. The Bank of England knows that no good will come of re-inflating the housing bubble, which would only result in worse pain down the road, as more consumers fall into the trap of too much debt.

Read More: http://www.economist.com/agenda/displayStory.cfm?story_id=4246182

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Posted by Adam Kritzer | in British Pound, Central Banks | No Comments »

IMF warns of slowing growth in EU

Aug. 11th 2005

The International Monetary Fund (IMF) recently reported on the prospects for growth in Euro-area economies. The report reinforced what most economists have argued for months: growth is slowing in the EU. The IMF now forecasts 2005 real GDP growth of 1.3% for the Euro, down from earlier forecasts of 1.9%. In comparison, it is expected the US economy will achieve 3.5% growth this year. The IMF also expects inflation in the Euro-area to decline. While it now seems that all of the pieces are in place for a cut in interest rates, the ECB voted last week to maintain current interest rate levels. It seems the Bank is simply resistant to economic logic. Xinhua News reports:

The IMF urged euro-zone governments to cut their budget deficits. It also warned that the euro-zone’s economic recovery remains vulnerable to soaring oil prices or the euro’s further appreciation.

Read More: IMF cuts economic growth forecasts for euro-zone

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Posted by Adam Kritzer | in Economic Indicators, Euro | No Comments »

Hedge Funds play currency markets

Aug. 10th 2005

As the number of new hedge funds grows, existing funds have found themselves in a continuous search for new investments. The latest fad among hedge funds is currency trading. The forex markets are the largest and most liquid in the world, and are largely unregulated. Because the ability to buy and sell multi-million dollar positions is paramount, hedge funds have piled into the markets. Industry experts now feel hedge funds moving in tandem are able to single-handedly defend or move currencies, which is a scary thought for those who though currency markets were immune to manipulation. Hedge funds, however, have argued that they function as a positive force in the markets. The Globe and Mail reports:

“I think that the more players that are out there, it’s going to improve liquidity and lead to less misalignments because there should be more money on both sides of the markets.”

Read More: Hedge funds throwing their weight around in global currency markets

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Posted by Adam Kritzer | in Investing & Trading | No Comments »

UK lowers interest rates

Aug. 9th 2005

Britain recently became the first developed country in two years to lower interest rates, guiding its repo rate downward to 4.5%. However, representatives from the Central Bank effectively dismissed speculation that other rate cuts would follow, calling the move “economic fine-tuning.” They will continue to target inflation, which is likely to resurface once Britain’s economy resumes its expansion. Many analysts believe policy-makers in other developed regions will soon follow suit, ushering in a period of tight monetary policy. Those analysts may be forced to wait, however. The Financial Times reports:

The European Central Bank maintained its main interest rate at 2 per cent. Recently, evidence from business surveys appeared to back its view that conditions in the eurozone were improving.

Read More: Bank of England makes first rate cut in two years

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Posted by Adam Kritzer | in British Pound, Central Banks | No Comments »

What’s behind the Dollar’s recent decline?

Aug. 8th 2005

In less than a month, the Euro has appreciated 4% against the Dollar, to the surprise and chagrin of traders who had been anticipating continued USD strength. Self-proclaimed experts have different theories on the recent weakness of the USD. Some cite technical reasons; each time the Euro dipped below $1.20, a de facto support level was created, as Euro bulls quickly rushed in to shore up the currency. Fundamental analysts argue the USD appreciated too fast and by too much; the current drop is merely a long overdue correction. Both USD bears and bulls, however, are equally surprised by the market’s sudden disinterest in economic indicators, which are overwhelmingly positive, and would seem to underscore support for the USD. The Wall Street Journal reports:

Since the dollar hit its most recent high versus the euro in early July, it’s seen a string of upbeat economic data, virtually no indication that U.S. rates are going to stop rising, and continued inflows of global investment dollars. The fundamental economic picture just keeps getting better.

Read More: Uncertainty in the Market Puts Falling Dollar at a Crossroads

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Posted by Adam Kritzer | in Investing & Trading, US Dollar | No Comments »

Will the ECB ever lower rates?

Aug. 5th 2005

European politicians, desperate to deflect negative attention, have repeatedly blamed the European Central Bank (ECB) for the economic woes of EU members. They argue that the ECB is unnecessarily targeting inflation, when it should be stimulating growth. Is the ECB responsible for the lackluster growth of the EU, and should it lower rates? The answer to both questions is ‘maybe.’ Tight fiscal policies and a strong Euro deserve at least some of the blame. The problem, argues one analyst, is not with the ECB’s monetary policy, itself, but rather the way in which it is communicated to the public. There is a fundamental lack of transparency and clarity in central bank decision making, which has the unintended consequence of confusing investors and consumers. The Economist reports:

While the ECB’s prime task is price stability, it is also legally charged with supporting growth. Last year it could have cut interest rates to offset the impact of the rising euro; today it should stand ready to ease monetary policy to cushion the impact of structural reform and fiscal discipline.

Read More: Less bashing, please

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Posted by Adam Kritzer | in Central Banks, Euro | No Comments »

Bank of China warns speculators

Aug. 4th 2005

In an unusual move, the Central Bank of China has posted an English message on its website: “The 2.1 percent adjustment does not mean that the Yuan exchange rate has been appreciated as a first step and that there will be further adjustments.” The message was clearly aimed at speculators, who continue to pour ‘hot money’ into China, in anticipation of future revaluations. China’s Central Bank has repeatedly tried to stem the inflow of capital, as it must spend billions to sterilize the flows and stabilize the Yuan, without triggering inflation. Despite the warning, and a drop in short term interest rates, speculators remain undeterred. They are not alone, as economists almost universally agree that another revaluation will take place in the near-term. The Tehran Times reports:

“The two percent revaluation has not relieved, and in fact has only intensified, yuan revaluation speculation,” said [a senior Chinese academic]. “What else is the central bank going to say in the face of mounting pressure?”

Read More: China battling renewed currency speculation despite dropping peg

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Posted by Adam Kritzer | in Chinese Yuan (RMB), Investing & Trading | No Comments »

Fundamental USD analysts shift attention

Aug. 4th 2005

In fundamental analysis, traders generally predicate trading decisions on economic indicators and interest rates. It seems the attention of fundamental analysts has shifted away from current account balances and towards general economic performance. Some analysts had previously posited a relationship between changes in a particular nation’s current account balance and the performance of its currency. Now, these analysts believe general economic strength will guide performance.

The basis for their reasoning is indirectly tied to monetary policy, as interest rate levels are generally correlated with economic performance. For example, as the American economy continues to grow, policy makers will likely raise interest rates. The economies of Britain, Australia, and New Zealand, in contrast, have entered periods of relative stagnancy, and will likely witness the tightening of monetary policy. The result will be narrowing interest rate differentials, which some analysts expect will underscore strength in the USD.

Read More: USD gains as carry trades are re-balanced

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Posted by Adam Kritzer | in Investing & Trading, US Dollar | No Comments »

Rising US rates could impact NZD

Aug. 3rd 2005

The New Zealand Dollar (NZD) continues to perform well, no doubt helped by a federal interest rate of 6.75%, which is currently the highest in the developed world. Investors in search of (relatively) risk- free returns have entered New Zealand en masse, sending the NZD to higher levels. This has occurred in spite of New Zealand’s lackluster economy, which is expected to grow by only 2% annually over the next couple of years. However, as US interest rates rise, the US-New Zealand interest rate differential, which in the past has been a source of NZD strength, narrows proportionately. This trend, combined with the prospect of falling rates in New Zealand, has led currency strategists to reevaluate their expectations for the NZD. Bloomberg news reports:

“With a declining yield spread against the U.S. we continue to favor selling rallies in the New Zealand dollar,” said a currency strategist at Bank of New Zealand.

Read More: N.Z. Dollar May Fall on Speculation Yield Advantage Will Narrow

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Posted by Adam Kritzer | in Central Banks, Major Currencies | No Comments »

Congress to address currency fraud

Aug. 2nd 2005

The FBI recently unearthed one of the largest currency schemes to date, charging a Chicago man with defrauding would-be currency traders of $50 million. It seems the culprit had lured (predominantly foreign) investors into currency trading by offering them ‘guaranteed returns’ in the largest market in the world. Unfortunately for the investors, he would simply send the money through a series of accounts before depositing it in his own.

This most recent and egregious scam has highlighted the growing prevalence of fraud in currency markets, due simply to lack of oversight. The Commodity Futures Trading Commission is technically charged with regulating the market, but has had its powers repeatedly curtailed by courts, who have argued the commission has no legal authority to police forex markets. However, Congress is planning to enhance regulation through the enactment of legislation, probably in the fall, which forex traders should take comfort in.

Read More: Loophole allows currency schemes to flourish

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Posted by Adam Kritzer | in Investing & Trading | No Comments »

Bloomberg Survey shows Yen strength

Aug. 1st 2005

Bloomberg news recently conducted a survey, asking professional currency traders to gauge their sentiments on various currencies. While there was tremendous variation in the results, a majority of traders admitted optimism in the Yen. A Citigroup analyst opined that bearish sentiment on the Yen had reached ‘extreme’ levels, and he was now advising clients to take positive positions. Other analysts agreed, noting renewed confidence in Japan’s economy. However, many were careful to note that the failed privatization of Japan Post would not be good for the Yen. Japanese lawmakers are set to vote on the bill by August 5th.

Read the full results of the survey

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Posted by Adam Kritzer | in Investing & Trading, Japanese Yen | No Comments »

Father of the Euro currency found dead

Aug. 1st 2005

Wim Duisenberg, former head of the European Central Bank, passed away at age 70. Mr. Duisenberg served this position from 1998 until 2003, during which he steered the multi-sate adoption of the Euro common currency. He has since been replaced by Jean-Claude Trichet. Economists and politicians continue to argue over who deserves the brunt of the blame for the Euro’s current troubles. However, all agree that Mr. Dusienberg should be commended for his leadership, in successfully implementing the Euro-system without agreement on economic and monetary policy. The Fiancial Times reports:

On Sunday a European Commission spokesman said: “As the first president of the European Central Bank Mr Duisenberg played a decisive role in the building of the monetary union and to the success of the introduction of the euro. “His dedication and determination as the head of the ECB allowed for the rapid establishment of the independence, credibility and competence of this institution.”

Read More: Enemy of inflation who steered euro

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Posted by Adam Kritzer | in Euro | No Comments »

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