By Andrew Wilkinson at IB:
It seems that European traders are more bullish of the dollar on their return from Easter vacation than they are of the euro. Despite a raft of bullish news surrounding the U.S. economy, the dollar had failed on Monday to find further support amid thin trading conditions. But European dealers appear to be once again running scared over Greece and its quest to square its debt obligations. The issue resurfaced after reports from London’s Financial Times that during April, Athens seeks to issue a multi-billion U.S. dollar denominated debt offering.
Euro – The euro was lower against 15 of the 16 major currencies in early New York trading as traders try to fathom how to best deal with the euro in the form of a soup sandwich. The FT revelation first surfaced last week and came directly although loosely from a Greek official who appeared to mulling the notion of selling dollar debts to foreigners. And so this portion of the story is hardly the shocker and if anything should be considered a positive step in Athens mission to get its deficit funded.
What is really concerning the market today is the news that Greece is apparently trying to bypass IMF assistance over the concern that a bilateral aid package would come with onerous strings attached. Under such conditions Athens apparently feels that its financial system would come under additional pressure resulting in a run on large banks deposits. You have to remember that this is the folklore across the market this morning and is hardly gospel. We have not as yet heard that the authorities of Greece are ready to look the IMF gift horse in its mouth. To that end you could say that such perhaps ill-founded speculation is having an adverse on the euro today.
In early trade the euro has fallen to an intraday low point at $1.3399 before moving a smidge higher to $1.3415. Nevertheless the single currency has recaptured some of Monday’s losses to the pound and it currently buys 88.35 pence. While against the yen the euro is weaker at ¥125.92. It certainly doesn’t feel like we have heard the last of the Ouzo Crisis at this stage and it is hard to say what will sweep it away from being a key issue. Certainly denial from Athens over its desire to ditch an IMF aid package would confound today’s latest batch of rumor-mongering.
U.S. Dollar – During the course of the last two weeks, the yield on the benchmark 10-year note has jumped by almost 40 basis points. There is growing concern that the successful implementation of monetary and fiscal policy measures are gaining sufficient traction that the Fed will have to start taking some of the easy money back. Signs from the service and manufacturing sectors that expansion is filtering through to the labor market have most recently failed to boost the dollar. As noted above, the impetus seems to have come from a weaker euro I the latest round rather than a stronger dollar. It will be curious to see how much of the market’s dollar gains for the first quarter have already discounted the recovery.
Aussie dollar – The RBA lifted its key benchmark rate by another quarter-point to stand at 4.25% for its fifth monetary tightening in seven months, leaving it with a batting average of five out of six meetings. The Aussie jumped in response and punished the neighboring New Zealand dollar by rising to a nine-year high. Against the greenback the Aussie is trying desperately to breach resistance at the mid-March peak at 92.50 U.S. cents. The going remains tough despite indications today from the RBA that it would still make steps towards a return to normal monetary conditions. In its statement the RBA distinguished between those parts of the world that suffer ongoing impairment as a result of the financial crisis from those in the Asian region that were less inflicted. It also pointed to the reduced boost from earlier stimulus measures and observed that the expansion into next year was taking a life of its own. It also raised its red flag over robust housing market activity where prices are rising.
Japanese yen – The yen is stronger across the board against the major units today after the Nikkei 225 stock market index reversed Monday’s 0.5% gain. The yen gained 0.4% to ¥93.96 against the dollar and was higher by 0.9% against the euro to ¥125.92. It rose most against the pound adding 1.1% to stand at ¥142.52.
British pound – As expected, the British Prime Minister Gordon Brown, made a trip to Buckingham Palace on Tuesday seeking dissolution of Parliament in preparation for a May 6 general election. The pound didn’t respond to the announcement, but did lose ground as an ICM poll for the liberal Guardian newspaper reported only a 4% distance between the two main parties. The pound slipped to $1.5129 having reached $1.5310 yesterday on the news, but to be fair, the poll remains at odds with a slew of other polls suggesting a 10% lead for the opposition Conservative party. Today’s election timetable does nothing to change the two-horse race.
Canadian dollar – In early Tuesday trading the Canadian dollar indeed reached parity against its southern neighbor and hit 1.0001 U.S. cents. That move came despite a stronger greenback taking the shine of the price of gold, which retreated by $8.00 to $1,124 per ounce. Crude oil prices above $86 per barrel continue to tell the same story of a rebound for the health of the global economy, which is supportive of the commodity-sensitive unit.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.