Investors have flocked to foreign exchange trading over the past 10 years, and the venture capital community is ready to grab a piece of the action.

Two companies -- Currensee Inc. and Tradonomi LLC -- are angling for central spots in this emerging trading community, and several funds are placing pretty big bets on their success. Currensee has a social network for forex traders, while Tradonomi's move was to create a game-like user interface to make it easier for would-be fortune-makers and thrill-seekers to trade foreign currencies.

The British pound (CME: $BPY) hit $1.60 for the first time in more than half a year this morning, thanks to improved service company sentiment and an increase in mortgage approvals. A rise in consumer confidence in the United States increased risk appetite and lifted the pound, as well.

The news was good enough for a 0.5% gain for the pound against the dollar, a 0.6% increase relative to the euro and 1% against the yen (CME: /JY\M09).

These days, the only thing worrying the economists and analysts more than the U.S. economy is the United Kingdom economy.

The U.K.'s situation is worrying currency traders, too. The dollar vaulted 5 cents Tuesday versus the British pound to $1.3890 -- an almost unprecedented move in the currency market -- as traders sensed a deepening recession in the U.K.

The dollar also strengthened 1 cent versus the euro to $1.2940 and 1.2 cents versus the Swiss franc to $1.1422. The dollar was essentially unchanged versus the yen at 90.45 yen.

Currency Trader Andrew Resnick told BloggingStocks Tuesday that with the United Kingdom's decision Monday to allocate an additional $142 billion to support the nation's banks, currency traders "have put the British economy in a time-out chair."

Free markets? Unfettered capitalism? Government getting out of the way so that businesses can operate?

Not exactly. Try mercantilism, national industrial policy, and monetary protectionism.

Japan's finance minister jolted currency markets early Thursday after he signaled that the Japanese government is prepared to intervene in the foreign exchange to support the dollar and euro and drive the yen lower.

The yen Thursday weakened 1.25 yen to 88.39 yen versus the dollar on the news. The yen also weakened 1.5 yen to 128.70 versus the euro. Both pairings had spiked significantly higher immediately after the finance minister's comments were published.

Finance Minister Shoichi Nakagawa said he has "the means" to limit the yen's advance.

In the modern era, Japan has periodically intervened in the market to drive the yen lower and support the dollar to prevent the yen from becoming too strong versus the dollar, and the world's other major currencies. A strong yen hurts Japan's export sales, including cars, by making those cars too expensive for foreign consumers.

The dollar plunged to a 13-year low against Japan's yen Friday, as currency traders sensed a further-deteriorating U.S. economy on the heels of the U.S. Senate's rejection of the Big Three rescue package.

The dollar plunged more than 3 yen -- an enormous move in the currency market -- to 88.40 early Friday before recovering slightly to 89.50 yen. The dollar also fell about one-quarter cent versus the euro to $1.3375 and one-half cent versus the Swiss franc to $1.1785.

Currency Trader Andrew Resnick told BloggingStocks Friday traders sense that U.S. stock investments will perform even worse now in 2009, as a disruption / cessation of operations by General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler will further decrease commercial activity, and GDP -- making U.S. investments less attractive.

"Currency traders are running for the hills now. They're running out of U.S. investments, which is bearish for the dollar. The yen is rising primarily as a safe haven and as a risk-aversion play, as it typically has during the financial crisis," Resnick said. "Japan's economy isn't that strong, it's in recession too, but as long as it doesn't contract as much as the U.S., traders will prefer the yen over the dollar," Resnick added that he was presently long with the yen versus the dollar, and long with the yen versus the euro.

Further, Resnick said he expects the dollar to fall to 75 yen, if public policy efforts aren't revived to save the U.S. auto sector.

Crises have a way of separating strong business models from sub-par ones. Similarly, they sometimes invalidate theories institutional investors and economists have adhered to for generations.

One example of the latter concerns the dollar. The Federal Reserve's balance sheet has increased to $3.5 trillion from $800 billion in September. Meanwhile, the U.S. budget deficit for fiscal 2009, will likely exceed $550 billion (pdf) and could top $1 trillion; it could top $1.2 trillion next year.

Had the aforementioned debt increases occurred in Brazil, Mexico, or Argentina, the result would have been a flight of international investors out of local investments, accompanying respective currency runs, and an ensuing domestic crises.

The impact of the increased debt on the United States? By almost all measures, it's been mild. Since September, the dollar has risen about 15% and 20% against the euro and British pound respectively. Meanwhile, borrowing costs for the U.S. government have trended lower, with interest rates on the 10-year and 30-year bonds falling to 2.79% and 3.29% respectively.

True, the dollar has fallen 13% versus Japan's yen, as institutional investors, unable to productively invest borrowed, low-interest-rate yen, returned that money to Japan, but by and large the dollar has remained firm amid the nation's worst financial and economic crisis in at least 40 years.

Many economists had expected the dollar to weaken. Economist Peter Dawson was one of them.

From fiscal and economic fundamental standpoints, this is something that shouldn't be happening. Or at least it wouldn't be happening in normal times.

But as investors know, and as currency traders will quickly point out, these are not normal times.

Safety is paramount

The dollar continues to hold its own, for the most part, versus the world's other major currencies, despite the fact that the United States is likely to bear the largest economic and fiscal costs stemming from the financial crisis and consequent recession. The dollar has held on to gains recorded earlier in the month against the euro and the British pound, at about $1.2670 and $1.4720, respectively, losing ground only against Japan's yen, at 96.60 yen.

Currency Trader Andrew Resnick said the dominant theme in the currency markets -- as in almost every market these days, it seems -- is risk aversion and a flight-to-safety.

"The dollar is clearly benefiting from the flight-to-safety. On an economic fundamentals basis, the dollar should not be this strong and U.S. interest rates should not be this low, but fundamentals are not ruling the day now," Resnick said. "Safety and the protection of capital is." Resnick added that he was presently flat, or had no open currency positions.

The dollar and yen surged Friday -- with the yen the clear winner head-to-head versus the dollar -- as traders and institutions added both currencies in a flight-to-safety on concern that all of the world's major economies will fall into a recession at the same time.

The dollar surged 3 cents versus the euro to $1.2642 and 6 cents versus the British pound to $1.5606.

The yen strengthened 4.7 yen to 92.64 versus the dollar and about 10 yen to 144.73 yen versus the British pound.

Institutions raise cash in dollars, yen

Currency Trader Andrew Resnick told BloggingStocks Friday, this morning's flight-to-safety is not solely due to economic fundamentals, which suggest slowing growth in the world's major economies, but also hedge fund / investment fund de-leveraging and closing out of losing stock positions.

"We're seeing many things happen at once, and that's producing these enormous moves. First, the carry trade [where traders borrow yen and invest it elsewhere] is unwinding. Leverage for investing purposes is declining as a trading strategy," Resnick said. "Second, major players are raising cash to cover redemptions, which is also causing stock markets globally to plunge."

"Third, we're seeing a re-pricing of risk to the higher, which is forcing some funds to raise even more cash, boosting the dollar," Resnick said. "Some of the moves are cash-necessary moves, but many are clearly panic-based, with traders exiting positions that have little chance of succeeding if the global economy continues to slow."

Here's an icebreaker for your next cocktail party or dinner party. (This one is sure to impress your friends and colleagues even more than explaining the market and economic significance of credit default swaps.)

Q: What's the strongest currency in the world?

Well, let's evaluate the world's major currencies and hone in on the answer.

• The dollar -- For the last few decades, the dollar was the world's strongest currency. After all, it is the world's reserve currency. However, recent history has not been too kind to the dollar -- the dollar's value has declined throughout the decade -- and the near-term outlook does not look good, either. Massive government spending to both end the financial crisis and put the U.S. economy on a sustainable growth track means additional inflation, if not dollar devaluation, is likely. Nix the dollar as the world's strongest currency.
  

• The British pound -- At one point in history, the sun never set on the British Empire, and the pound was the world's reserve currency. Although the pound has been strong this decade, likely additional interest rate cuts and fiscal stimulus to jump start the economy of Her Majesty's Kingdom, as John Lennon would refer to his native land, means the pound is likely to lose value in the year ahead. Nix the pound as the world's strongest currency.
  

• The euro -- The euro has challenged the dollar for reserve currency status this decade, and has gained versus the buck for most of that time, but you guessed it: the heavy hand of the financial crisis is beginning to take a toll. For example, Germany alone has approved a 650 billion euro (or $500 billion) bank rescue plan. That's equivalent to the U.S. putting in place a $2.5 trillion plan. Wow. Let's hope Germany doesn't have to use most of it. Of course, the euro zone is more than Germany, but severe stagnation in Germany suggests several more interest rate cuts by the European Central Bank. Nix the euro as the world's strongest currency.

The stance of currency traders as the U.S. Treasury's $700 billion bailout enters a House/Senate conference committee before floors votes and a transmittal to President Bush's desk? Stand aside, for now.

True, the dollar was holding its own Thursday at mid-day against the world's other major currencies, and the Dow was up about 250 points to 11,077 in what some called a 'euphoria rally,' but caution remains the order of the day, regarding the dollar, so says currency trader Andrew Resnick.

"There are still too many unknowns regarding the bailout bill to make an informed conclusion regarding the dollar's prospects at this juncture, so the best stance is standing aside," Resnick said. He added that he was presently flat, or had no open currency trading positions.

For the record, the dollar was slightly higher, up about one-half cent to $1.8401 versus the British pound, but down a quarter-cent to $1.4645 versus the euro. The greenback was also up about one-half yen to 106.56 versus Japan's yen.

The above moves are "statistically insignificant," given the basket of fiscal, monetary, financial sector, and economic unknowns relating to the United States economy, Resnick said.

"We won't know the dollar's fate until we know how much money the U.S. Treasury will spend, in what increments, its primary method of funding, what assets it will buy and at what prices, and how much money the [U.S.] government will have left to deal with other issues," Resnick said. "These are enormous issues, so the situation will remain clouded until we know more."

The initial analysis regarding the dollar's latest move suggests this dollar rally has legs, but don't write or e-mail home just yet. "We have to take things one day at a time with this dollar move," currency trader Andrew Resnick told BloggingStocks Thursday.

Discretion -- yes, the better part of valor -- is advised because the dollar's rally "is not being driven by robust U.S. economic data or by a conviction that all is well financially in the United States, but by sentiment that Europe's economy is trending toward a recession," Resnick said.

That sentiment propelled the dollar to a 1-year high versus the euro Thursday, good for a 1 cent improvement to $1.3911. The dollar also strengthened about a quarter-cent to $1.7515 versus the British pound.

Resnick added that the market "is basically factoring-in an interest rate cut by the ECB at its next meeting in October." The European Central Bank kept its key, short-term rate, the refinance rate, the same at 4.25% at its September meeting.

The comeback of the beleaguered dollar continues.

The dollar strengthened to a six-month high versus the euro Tuesday, and also rose against the world's other major currencies on a growing consensus in foreign exchange circles that global economic fundamentals are shifting in favor of the greenback.

The dollar strengthened about 1.5 cents to $1.4465 versus the euro, and about 1.4 cents to $1.7877 versus the British pound Tuesday at mid-day. The buck also gained one-half yen to 108.62 versus Japan's yen.

Pivotal for dollar: Europe, Asia GDP

Further, although Tuesday's dollar catalyst was the realization that Hurricane Gustav would cause considerably less-than-forecast damage to Southeast U.S. oil production and the refinery infrastructure, trader Andrew Resnick told BloggingStocks the longer-term focus remains regional GDP growth.

"With Hurricane Gustav out of the way, sentiment's building that this dollar rally has legs. European growth has slowed to recession levels, and China's economy has slowed as well. For Europe, lower interest rates are likely to follow, and that's dollar bullish," Resnick said. Resnick added that he expects the Bank of England to cut its benchmark interest rate by a quarter-point to 4.75% when it meets September 4. He doesn't expect the European Central Bank to lower its 4.25% refinance rate on September 4, but that stand-pat policy may change to accommodation, later this fall.

Some market signals are well-known and easily understood. Others are arcane and more-complex, but just as telling.

There's mounting evidence that the "carry trade" is ending, or that at least institutional investors are decreasing their use of it as an investment tactic.

In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) and buy assets in a country where returns are higher. The investment can take many forms, including stocks, bonds, funds, or even the higher-interest currency itself.

Carry trade: A growth confidence indicator

Now, investors/readers may legitimately ask, Why is it important to know what's happening to the carry trade?

Economist Peter Dawson told BloggingStocks that it's important to monitor carry trade flows and data because it's one indicator of investor confidence in a market's ability to produce a return on equity, and by extension, in its economy to grow.

In other words, the carry trade abounds when investors are confident; it wanes when they're not, he said.

The dollar Friday was on course to record its fifth consecutive weekly gain, propelled higher by the prospect that economies in Europe may be later in the recession/expansion economic cycle than the United States.

The above suggests the Bank of England and the European Central Bank will have to cut interest rates -- itself a bullish factor for the dollar -- with the U.S. economy recovering sooner than the economies in the United Kingdom and euro-zone -- another dollar-bullish circumstance.

On Friday, the dollar strengthened 1.5 cents to $1.4675 versus the euro, and about seven-tenths of a cent to $1.8632 versus the British pound. The dollar also rose about 1 yen to 110.61 versus Japan's yen and about one-half cent to $1.0988 versus the Swiss franc.

From dollar-bear to dollar-skeptic

Currency Trader Andrew Resnick said he's not a dollar bull yet, but the changing global economic landscape has moved him from the dollar-bear category to "the dollar-skeptic category."

"Clearly, fundamentals are shifting in favor of the dollar. Global growth is slowing, taking pressure off commodity prices. Export gains are lowering the U.S. trade deficit, and there's now a better than 60% chance Europe [including the U.K.] will have to cut interest rates," Resnick said. "Those are the best fundamentals for the dollar in about three years." Resnick added that he's presently flat, or had no open currency trading positions.

The dollar was on-pace to record another weekly decline Friday - - undoing the gains against the euro and pound earlier this summer- - as traders and analysts debated the likely next step for the U.S. Congress and/or the U.S. Federal Reserve on the heels of possible additional massive, mortgage-asset-related write-downs by Fannie Mae and Freddie Mac.

The dollar traded at about $1.5888 to the euro Friday at mid-day, down about 1 cent, and also within about 1 cent of an all-time low versus the euro. The dollar also traded at $1.9878 to the British pound, also down about 1 cent, and off about 1 yen to 106.09 versus Japan's yen.

Currency trader Andrew Resnick said that given the dollar's decade-long slide versus the world's other major currencies, it's difficult to fathom further dollar declines, but that's what the economic fundamentals suggest.

"From one perspective, you have to ask, at what point do central bankers say the dollar's slide poses serious risks of commodity prices rises and inflation, with negative consequences for global growth?" Resnick. "On the scale of competing demands, you can make a strong argument that the dollar can not be permitted to slide much further."

However, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), which face additional losses, Bloomberg News reported Friday, could come under full control, also called conservatorship, of government regulators, or receive bridge loans from the U.S. Congress or the Fed, Resnick said, absent a private equity investment. In any event, if Fannie's and Freddie's additional losses hit key levels, "we're looking at another enormous government obligation, and that's not good news for the dollar," Resnick said. "It means more dollars in circulation, which combined with the weak U.S. economy, will drive the dollar lower."

Resnick added that he presently is short with the dollar in the euro / dollar, British pound / dollar, and yen / dollar currency pairings.