Greenback retreats in currency trading

Yesterday, the U.S. dollar was gaining in forex trading as risk aversion sent traders looking for a safe haven. Today, the story has changed. With the stock market on the rebound and Treasury secretary Timothy Geithner sounding optimistic, risk aversion is making an appearance.

Right now, dollar bears are in control, sending the greenback lower in currency trading on the FX market. With focus back on a stock market that is rebounding, and concern about the fundamentals of debt in the economy are a major issue.

However, true economic recovery is a long way off. Before the recession actually ends, we are likely to see some more see-sawing on the financial markets.

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TARP not getting back the value it has been putting into banks

Back in fall 2008, the program known as TARP was approved by Congress. The idea was to allow money for banks in trouble at special rates, in exchange for assets. However, even with assets, TARP stands to lose money. BusinessWeek reports on the issues behind possible TARP losses:

Although the Treasury has been taking stock and warrants in companies in exchange for TARP funds, from the start the value of assets it has received has been much less than the TARP money it has doled out. For every $100 of TARP money disbursed, the government has gotten stock and warrants worth just $66 at the time of issuance, [Elizabeth] Warren said in an Apr. 15 interview with Jon Stewart on The Daily Show. The value of those assets has deteriorated further since being issued, she said.

Of course, there is a possibility that these assets could be worth quite a bit down the road, if the government is willing to hold on to them long-term. However, it will require a substantial turnaround in the stock market — especially in the financial sector — for these assets to be worth much of anything. Until then, taxpayers are likely to remain in the hole.

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CPI data lower than expected for March

After yesterday’s retail sales data, there were doubts in some camps about how today’s consumer prices data would turn out. And those doubts proved founded. CPI data is in, and consumer prices dipped more than expected for the month of March.

Falling consumer prices are evidence of deflation, the opposite of inflation. Instead of economic growth, which often drives a rise in prices, the economy appears to be experiencing deflation, or a drop in prices. With decreased jobs and wages, it is no surprise that low demand is keeping retailers and others from raising their prices.

The U.S. dollar is expected to see some gains in forex trading on this information. With economic data still showing weakness, the greenback is likely to be used as a safe haven investment. However, once the economy picks up, there is a chance that dollar weakeness will return to forex trading.

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More than 75 local currency systems at work in the United States

Back during the Great Depression, many communities began circulating their own currencies in order to help local economies and keep business transactions in town. Now this trend is re-emerging as the popularity of local currency systems grows.

One of the latest attempts at a local currency is now being used in Detroit. Detroit is now creating a currency known as Cheers to be used at local businesses. Detroit is one of the hardest-hit metro areas in the U.S. due to recession, so it is little wonder that businesses are trying to encourage some sort of spending in the local economy.

Detroit follows in the footsteps of other local currencies, such as Totnes in Britain and BerkShares in Massachusetts. These communities have been experimenting with local currencies for quite some time. And, while some local currencies were started in order to combat globalism and big box chain stores, now these currencies are springing up in order to combat recession and help boost local economies.

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Access lines to euro, yen, pound and franc

Central banks have been making efforts to promote liquidity and stability during this financial crisis. One of the tools used to do this is the currency swap line. An agreement has been reached that creates access to lines between the U.S. Federal Reserve and access to euro, yen, pound and franc. Bloomberg reports on the hopes attached to these swap lines:

“Should the need arise, euro, yen, sterling and Swiss francs would be provided to the Federal Reserve via these additional swap arrangements with the relevant central banks,” the Fed said in a statement today. “Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets.”

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China targets emerging markets to increase the presence of the Chinese yuan

Recently, China suggested that a global reserve currency be adopted — one based on special drawing rights on the International Monetary Fund. However, Chinese officials must have realized at the outset that such a suggestion would probably not be seriously considered. Instead, China has been arranging swaps with emerging markets and trying to increase the number of countries using the Chinese yuan.

Right now, the main swap is focused on Argentina. China arranged a swap of Argentine pesos for Chinese yuan. The swap provides backing for the peso — and establishes the yuan as a reserve currency of sorts. The Forex Blog reports on the likely motives behind the currency swap:

In actuality, the swap was probably proposed by China in order to demonstrate its sincerity in seeing the Dollar replaced as reserve currency. Especially among developing countries and/or Asian countries, many of which represent major trading partners, China is keen to increase the supply of Yuan.

If China can get more emerging markets and others to increase their own supplies of yuan, a global reserve currency via the IMF to replace the dollar won’t be necessary. It could be that China’s true aim is to get people thinking that maybe the dollar shouldn’t be the world’s reserve currency, opening them up to the idea of a new currency backed by China.

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Retail sales show gains, could indicate economic turnaround

The U.S. economy might be on the road to recovery, if one looks at retail sales data. Even though consumer confidence remains near historic lows, there has been some gains in spending. The Street reports on the improvement in retail sales since November:

A sharp turnaround in retail stocks since November could be hinting at an economic recovery sooner than economists are predicting, although analysts are unsure whether the valuation and sentiment is a good mix for investors looking to bet on a rebound.

As you can see, there are some misgivings about this turnaround. However, if retail sales are hailing an economic recovery, it is likely to result in more weakness for the U.S. dollar. Things have been volatile the last couple of days, but as things improve on the global economic stage, the greenback is likely to even out a bit — on the downside.

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No real threat to the U.S. dollar as the world’s reserve currency?

The news ahead of the G20 summit later this week is all about a proposal from China — and backed by Russia — to create a new reserve currency system in the form of special drawing rights on the IMF.

However, despite all of the play it is getting, the idea hasn’t been well-received by most of the economically developed nations. At any rate, reports FX Street, the U.S. dollar is likely safe as the world’s reserve currency:

There looks to be little, if any, credible threat to the US dollar’s status as world reserve currency. Even if talk on SDRs does gain momentum at or after the G20, there’s still little chance of dethroning the dollar without more detailed proposals with legitimate

World Bank President Robert Zoellick said recently, “to create a reserve currency you need to have more than a summit or a meeting, you have to create financial markets where people feel comfortable moving in and out of the currency.”

Even though World Bank is planning to create a $50 billion trade fund, it is unlikely to have any sort of impact on reserve currency status. It is merely something designed to help ease the flow of money through the global financial system.

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The dollar and yen rose on Friday as stocks fell and risk appetite declined. The Dow fell 148 points to 7776 but rose 6.8% for the week. The yen was supported by increased risk aversion and repatriation flows ahead of the end of Japan’s fiscal year on March 31. The…

The Euro also slid heavily against the Dollar, as Germany’s Finance Minister warned that the Euro could suffer if members of the Euro-zone fail to respect the European Union’s stability and growth pact. The pact says that countries are supposed to keep budget deficits below 3%, which could be tested…