DOLLAR STRENGTHENS AS EUROZONE CONTAGION LOOMS

This morning’s FX View from IB:

So much for spinning on a dime as far as a euro currency rebound goes. The rally in the fortunes of the single currency proved to be nothing more than a passing ship in the night. The Herculean efforts to reduce its fiscal deficit, or at least those put down on paper by the Greek government, have served to put the less austere measures from governments in Spain and Portugal on center stage. And thus the tragedy drags on, weighing on the health of European economic recovery, and in its wake has dragged the euro down to its weakest level against the dollar since June 2009 – a seven month low.

Euro – The ECB voted to keep its interest rates unchanged to no one’s surprise this afternoon. The press conference follows in due course although it’s unlikely that ECB President Jean Claude Trichet will want to use this opportunity to further address fiscal follies amongst peripheral nations. The euro slipped earlier against the dollar to $1.3827 before rising to its current $1.3848 leaving it down half a cent on the day. Against the Japanese yen the euro lost 0.72 yen to stand at ¥125.72.

British pound – The Bank of England indeed voted against extending the value of corporate and government bonds at Thursday’s monetary policy meeting announcing in its statement that it would instead leave the door open in the event that a weakening credit situation demanded further purchases going forward. In a sense, today’s decision removes the drip from the patient’s arm and the nurse can always reinsert the needle if Britannia fails to recover under her own steam. The pound was lower in line with the euro against the dollar, falling to $1.5806 at its morning low before adding a half cent to reduce the day’s losses to about a half cent at $1.5858.

Aussie dollar – Weakness in domestic retail sales harmed the Aussie dollar Thursday. Investors anticipating that December sales would rise by 0.2% over the prior month were disappointed to learn that in the event sales declined by 0.7%. This could be seen as evidence that the three earlier interest rate rises from the Reserve Bank of Australia had a considerable impact. The Bank makes its quarterly monetary and economic review available later this week although it’s already stated that it has very little early evidence to go on to evince the impact of its policy changes. The Aussie reached a six-week low against the dollar at 87.75 U.S. cents although has since recovered to 88.04 cents. The unit was also hampered by a shock spike in the unemployment rate in neighboring New Zealand, which dampened demand for its dollar and weighed on regional sentiment. Copper and gold prices are also lower in light of preparations for the new Chinese lunar year with some evidence of position lightening from Chinese investors.

U.S. dollar – Weekly initial claims data deepened weaker sentiment towards equities before U.S. markets opened. Hopes for a positive reading for January payrolls due out on Friday were dashed as an expected 455,000 initial unemployment claims proved overly optimistic in the face of a true reading of 480,000. While the number remains below half a million, investors can hold on to their angst for a while longer as the job losses continue to taper with Spartan evidence that employers are ready to turn on the hiring spigots.

Japanese yen – Although the Japanese yen has gained ground against the major units overnight, it’s still not benefitting from the same type of safe haven bid that typically accompanies weakness in global equity markets. Against the U.S. dollar, the traffic seems to be largely one way at present and yen bulls are likely to remain disappointed to learn that it’s the dollar that is winning this battle. That said, today the yen rose marginally to stand at ¥90.75, but you have to remember that this is now in light of a dollar rally to ¥91.28 yesterday.

Canadian dollar – Following an earlier overnight decline the Canadian dollar has regained its poise against the U.S. dollar and is now unchanged at 94.19 U.S. cents. The robust nature of the loonie’s performance is possibly best accounted for by the fact that it’s rooted in a resource-rich nation, benefitting from an ability to deal faster with domestic problems due to a smaller population, while benefitting from recovery in the United States. Both Chinese and Russian central banks have recently stated that they have stepped up the pace of purchases to hold in reserves as an alternative to the U.S. dollar.

Source: IB