Dollar stronger amidst risk off day

As sure as night follows day, Wednesday is getting underway as a risk-off day as investors continue to worry about the future prospects for the global recovery. The yen continued to hover around its highest price per dollar since December indicative of rising risk aversion climate.

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U.S. Dollar – The dollar’s gains today have hoisted the dollar index largely on account of its moves against both the euro and Canadian dollar. Risk aversion has come back to center stage after global stock indices responded badly to Tuesday’s service sector ISM report, which slowed to its least expansive reading since February. The June index came in at 53.8, weaker than the predicted reading of 55.0 and below the May outcome of 55.4.

Euro – The risk-off tone is evident in a weaker euro today, which buys $1.2574. German factory orders fell during May by 0.5%, although April data was revised to a stronger reading. The Eurozone also reported first quarter GDP growth of 0.2% up over the prior quarter but the data doesn’t reveal anything new or necessarily worrisome for the future prospects of the euro.

Investors’ nerves were partially soothed by a successful syndicated sale of Spanish debt, which went off smoothly. Some of the nervousness surrounds the expected announcement of details surrounding stress tests by a European commission of bank supervisors. The authorities are expected to implement testing of 100 banks within and in some cases beyond the Eurozone area to better understand their financial strength under conditions of economic and market stress. German lawmakers also approved the proposed €100 billion austerity budget of spending cuts and tax increases leading some investors to fret about precisely how the economy might have its wings clipped.

Japanese yen – Data due out tomorrow is likely to show weakness in Japanese machinery tool orders in a further coincident sign that global demand is waning. Investors have thereby been flocking to the safety of the low-yielding yen, which today rose per euro to ¥109.62 while strengthening to ¥131.84 against the British pound.

British pound – The overall negative market tone has caused the British pound to continue a fall from a recent peak. That peak was inspired by somewhat of a honeymoon period for the pound following the general election and implementation of a stringent emergency budget. While nothing there has changed, what has changed is the perceived outlook for global growth and has dragged the pound lower to $1.5118 this morning. An industry report showed a dip in the index of permanent job placements for June to its lowest in five months. The pound managed to rebound marginally per euro to 83.16 pence.

Aussie dollar – The Aussie unit gave up a whole cent of yesterday’s rally as it declined to 84.50 U.S. cents overnight. An index from the building industry showed that construction activity slipped into contraction territory for the first time this year. The Aussie currently buys 84.90 cents. Other news overnight showed that powdered milk prices from Auckland-based Fonterra of New Zealand slipped for a third consecutive month, perhaps indicating weaker global demand.

Canadian dollar –Investors eagerly await the Ivey PMI survey to find out the latest direction for the domestic economy. The index is expected to read 63.5. It should show some weakness in line with other evidence of softening at the edges. Building permit data out on Tuesday showed a 10.8% monthly slump making for a fifth decline in seven readings of the report. Like the Aussie the Canadian dollar gave up a cent off Tuesday’s peak but has rebounded off that overnight low to trade at 94.50 U.S. cents.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school.