Celebrating a two-week high against a basket of foreign currencies, the dollar rallied even though investors are still worried about the global economy and the way it is rapidly deteriorating.  Investors have been shunning risky assets and moving back to the safety of the American dollar.  Additionally, a mass sell-off in stock markets all over the world has also dampened investor’s tastes for risk appetites and this has boosted both the demand for the dollar and the Japanese yen.  Pressure for selling the Euro has been affected by the break in recent trading ranges as well.

According to Brian Dolan who is the head of the currency research department at Forex.com located out of Bedminster, New Jersey, “We had built into a consolidation range since the lows on Oct. 27th and what we’re seeing today is a break of the euro and the pound to the downside out of that consolidation range.  The lower it goes, the greater the weakness.

“The overall driver is just the slowing global outlook and the dollar generally does a bit better in that environment, not to mention that the selling is focusing on the euro zone, UK and Australia, all of which are facing incoming weak data that likely will continue to highlight downside risks in their economies,” he added.

American stocks have tumbled due to production cuts at the countries major aluminum maker and cash drains at General Motors.  With signs pointing towards a faltering Chinese economy, investors are beginning to fear the impending global economic slump.  Andrew Busch who is a global FX strategist at BMO Capital Markets commented, “With the depressing news on the global economy continuing to spill out, the U.S. dollar and the Japanese yen rally.  The recession is spreading as the credit crisis winds blow the radioactive waste further and further throughout the world.”

Even with the slowing growth across the world, the yen continued to trade broadly on carry trades.  The yen is commonly used because it is a low yielding currency which is traditionally used to buy assets in higher yielding currencies.  The Euro is being weighed by the steep losses in crude oil and American stocks.  The pound fell to its lowest trading level in 12 years on trade weighted basis and hit its lowest against the euro, making analysts and investors believe that the economy of the United Kingdom will suffer more than the euro zone community.

“For the currency market, the decline in oil prices is bullish for the U.S. dollar and Japanese yen, but bearish for the euro,” said Kathy Lien, director of currency research at GFT Forex in New York. “Since the beginning of the year, there has been a 70 percent positive correlation between the euro/dollar and the price of oil.”