The euro has climbed to a 3 week high against the U.S. dollar as foreign exchange traders continue to pile on risky assets. There are no top tier U.S. economic reports due for release this morning which suggests that it should be quiet trading ahead of the Beige Book report, barring any wild volatility in the stock market.
The disappointing non-farm payrolls number and trade balance report continue to have lingering effects on the U.S. dollar but the decline in volatility is contributing to the rally in the euro and other high yielding currencies. The VIX, which measures the volatility in the stock market fell to a 1.5 year low earlier this week and remains near that level. Low volatility fuels risk appetite and encourages traders to use cheap funding currencies like the dollar and the Yen to fund investments in high yielding currencies like the, euro and Australian dollars. Today's recovery in USD/JPY confirms that risk appetite has improved. As long as volatility remains low, the EUR/USD may make a run for its next level of resistance at 1.4675.
The following chart illustrates the relationship between the VIX and USD/EUR (inverted version of EUR/USD). As you can see, as volatility declines, the dollar declines against the Euro.
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