Morning Foreign Exchange Report : Oil Prices Edge Lower and Appetite for Risk Strenthens

Published: Monday, 28 February 2011 06:20 BST - Written by John Cameron

STORY LINK Morning Foreign Exchange Report : Oil Prices Edge Lower and Appetite for Risk Strenthens

Wholesale crude oil prices edged downwards during Friday’s session, having touched 30-month highs on Thursday. Political instability in North Africa had caused crude to rally, but the bidding pressure eased on Friday following comments from Saudi Arabian officials suggesting that they would be expanding oil production, perhaps by as much as 700,000 barrels per day, in order to compensate for the loss of supply caused by Libyan unrest.

Fears over an escalation of the Arab crisis have caused a sharp dip in world equities over the past seven days, but Friday saw a reversal of this downtrend with gains for all major share markets. This trend has continued into the first Asian session of the week, with Tokyo and Hong Kong making significant gains overnight. Asian markets were assisted by better-than-anticipated Japanese retail trade figures for January.

Global shares have been on a major bull run since last summer and if the last week proves to be a short-term blip and the up-trend resumes this week, signalling an up-tick in risk sentiment, then the US Dollar may suffer significant selling pressure. Top of the range oil prices also look to be suppressing the Dollar, with the US consuming more than twice as much crude as any other nation. America is currently in the middle of its peak mid-winter period of oil consumption.

Ordinarily, the downturn in appetite for risk which we have seen in the last week would have caused major support for the Greenback. However, investors holding Dollar-denominated assets will have watched with concern over recent sessions as the US currency failed to make significant gains, whilst other safe haven currencies including the Japanese Yen and Swiss Franc strengthened to new near-term highs.

The Dollar is being suppressed by the Federal Reserve’s continuing commitment to the American asset purchase scheme which is threatening it’s status as the world’s reserve currency of choice. The expectation that US interest rates will remain low on an ongoing basis is also harming the dollar. Friday’s Non-Farm Payrolls will be closely-watched for further evidence on the state of the world’s largest economy.

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