The U.S. Dollar gained across the board against all other major currencies last week. The Greenback's strength was initially sparked off by the European financial crisis.
Nevertheless, the Dollar soon reacted even more strongly to increasing tensions between North and South Korea that prompted significant safe haven Dollar buying across the board.
North Korea Fires Artillery on Small South Korean Island
Last Tuesday, financial markets were shaken by the unexpected artillery attack by North Korea on a small island known as Yeonpyeong in the Yellow Sea which belongs to South Korea. The attack resulted in four deaths, of which two were South Korean marines and two were civilians. Eighteen other people were wounded in the attack.
North Korea blamed the hostile action on South Korea holding artillery drills close to North Korea's maritime border, and it threatened that the country would be "merciless" if the South's military drills get too close to their border.
South Korean President Warns North Which Responds Threateningly
Earlier today, South Korean President Lee Myung-bak took responsibility for failing to protect the South Korean people from the North Korean attack. He also expressed outrage at the "ruthlessness of the North Korean regime".
Myung-bak added that, "I feel deeply responsible for failing to protect my people's lives and property." Furthermore, he went on to say that,
"If the North commits any additional provocations against the South, we will make sure that it pays a dear price without fail."
The South Korean president did not specify in his speech what measures the South Koreans plan to take in response to last week's attacks, with the exception of a promise to strengthen his country's military force.
Nevertheless, minutes after the conclusion of his speech, the North Koreans issued a threatening statement saying that the joint South Korean/ United States' military drills planned to take place this week were "yet another grave military provocation."
Greenback Rises Correctively on Safe Haven Buying
The recent increase in hostility between North and South Korea that began last week had an immediate effect on financial markets all over the world, with the forex market impact being primarily to drive the U.S. Dollar sharply higher on safe haven buying activity.
Nevertheless, the Greenback came off somewhat last Wednesday as Asian markets recovered some lost ground after the United Nations Command called to "deescalate the situation" and stop the "unprovoked attacks".
Ultimately, the U.S. Dollar finished last week considerably higher against the Euro, Sterling, the New Zealand Dollar and the Australian Dollar, while ending up moderately higher against the Japanese Yen and the Canadian Dollar.
The European currencies also suffered from the continuing European financial crisis of which Ireland was the latest Eurozone country to request bailout funds.
U.S. Dollar Decline Reverses in the Near Term
Despite its previous medium term decline, the U.S. Dollar's fortunes now seem to have reversed in the short term. Given the current momentum of this correction, it seems that the U.S. currency will probably continue gaining against most other major currencies - at least for the time being.
Nevertheless, it is still too early to tell how successful the results of the next round of QEII economic stimulus measures will be on the U.S. economy. Furthermore, the market is still understandably cautious about taking the Greenback much higher since QEII involves expanding the U.S. money supply by printing billions of new dollars - mostly to purchase existing Treasury bonds - which should eventually devalue the Dollar.
Furthermore, with the continuing weakness in the U.S. economy still being exacerbated by relatively high unemployment and a sluggish housing market, future gains for the Greenback will most likely be based on increased risk aversion or a flight to quality which could continued to lend some temporary support to the U.S. currency.
No comments:
Post a Comment