Looking For Risk Takers To Boost Dollar. By Nicholas Hastings

The recovery in global risk appetite won't hurt the dollar this time around.

On the contrary, the currency will benefit now that faith in the U.S. banking system is on the rise and confidence in the country's economy has started to return.

However, there will certainly be hiccups for the dollar on the way.

There is still the risk that improvements in the U.S. economy are due largely to a buildup in inventories rather than a recovery in base demand.

Or, as San Francisco Fed President Janet Yellen has warned, some areas of the economy, such as commercial real estate, remain a potential problem.

And with China making a forthright shift away from tucking its reserves away in dollar assets, the U.S. currency could lose a major source of support.

Nonetheless, there is a distinct change in the way major currencies are trading.

Up until now, a rise in risk appetite was bad news for safe-haven currencies such as the dollar as investors pulled out in favor of high-risk assets elsewhere.

However, increasing evidence that the recession in the U.S. has gone as far as it can go and reassurance from the U.S. Treasury this week that the country's banks aren't at risk from bankruptcy will help to make investors that much more positive about U.S. assets.




The strong rally in equity markets, the success of this week's U.S. 10-year Treasury auction, and the sharp decline in U.S. swap spreads all point to rising investor confidence and easing credit conditions that will pave the way for recovery.

Currency strategists at Calyon Credit Agricole reported that their measure of risk aversion has fallen 32% in recent weeks, whether or not the new optimism over a global recovery is justified by the data.

"The economy is still ugly, just less ugly that before," said Daragh Maher, the bank's deputy head of global foreign exchange strategy.

Ulrich Leuchtmann, head of currency strategy with Commerzbank in Frankfurt, said, however, that the key to the market's new mood is the fact that investors are now looking beyond the recession.

For evidence of this, he points to the dollar's reaction to Wednesday's news that ADP private-sector employment figures were better than expected.

Instead of falling as risk appetite rose, as it would have in the past, the dollar rallied.

"This demonstrates that positive data are no longer negative for the dollar," Leuchtmann said.

As the market waits for the latest non-farm payrolls later Friday, the dollar could well be poised to rally more, especially now that many investors are convinced that the massive spending packages and sharp quantitative easing measures are finally succeeding in turning the U.S. economy around.

Early Friday in Europe, the market is still undergoing a shakedown after the ECB cut rates and raised liquidity, the U.S. Treasury announced the results of its bank stress tests. The market has also started to discount a fall of about 610,000 in the latest non-farm payrolls later Friday.

The resulting rise in risk appetite, reflected in a 0.5% rally in the Nikkei, helped the dollar to rise to Y99.29 by 0717 GMT from Y99.04 late Thursday in New York, according to EBS.

The euro was the main w