Euro restrained by fears over French downgrade

Risk-related currencies are making gains in early New York trading as European stocks inspired positive follow-through for S&P index futures. The dollar index has reversed an earlier gain and is losing out to the commodity pair from Australia and Canada. Meanwhile the euro is having a hard time moving forward as onlookers find new reasons to retain a bearish stance on the prospects for the region.

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Euro – After a spate of downgrades and warnings over prospects for future downgrades for European nations, the euro continues to struggle this morning and remains below Friday’s close against the dollar. The euro this morning buys $1.3164 and looks pretty bleak in the face of rallies elsewhere. So far the single currency hasn’t even threatened $1.3200 as offers above its current price weigh heavily on sentiment. Adding to the dour tone is market chatter over a possible threat to the credit rating of French government debt. Already the rating implied by trading in the insurance market for French bondholders is seven notches below its actual rating and just three notches above junk status. With an Irish downgrade by Moody’s along with its demotion to negative watch for Spain and a similar fate for Belgian debt from S&P, investors are treading carefully as though another shoe was set to drop. Also weighing on sentiment today is a comment from the ECB in which it sounds off over draft legislation from the Irish government as it tries to remedy its banking system. The ECB notes that such a move would destabilize its effort to run its liquidity operations. And here we were thinking that the ECB was involved in the recent move to assist the Irish.

U.S. Dollar – The dollar index firmed after a South Korean performed a military drill involving live ammunition on one if its borderline islands. The exercise failed to spark retaliatory fire from the North but did remind investors over the elevated geopolitical risks apparent in the market. The index reversed earlier gains but now remains marginally higher at 80.43. During the week, investors will be reminded of the impact of gradually firming economic data in a final reading for third quarter GDP, which is expected to be revised up to an annualized 2.8% pace.

Aussie dollar – Despite some caution earlier in the European session, the Aussie has since found its feet and is in full flight despite the caution in the Asian region over the Korean peninsula. Lately in New York the Aussie bought 99.41 U.S. cents as it rushed to its strongest in three sessions. There was some earlier apprehension, though, as dealers wonder what Tuesday’s RBA minutes might deliver. There is some fear that the minutes will confirm the notion that the central bank is now highly unlikely to alter monetary policy much before the middle of 2011.

Canadian dollar – The loonie was sparked into life as the Aussie rose but could only manage a jump to just above unchanged on the day to 98.80 U.S. cents. The Canadian dollar has since pared gains to stand at 98.60 cents.

British pound – The CBI trade body came out with a prediction this morning that the Bank of England will be in rate-increasing mood by the middle of 2011 and won’t stop until it has raised interest rates from 0.5% to 2.75% as it struggles with inflation. The CBI blames stubbornly high energy and commodity costs for a ninth consecutive breach of the government’s 3% ceiling for inflation, which last week came out at 3.3% for November. The CBI sees the Bank of England held hostage to the misfortunes of inflation beyond next year causing it to tighten policy while predicting ongoing falls for home prices. The CBI forecasts the economy will grow at a 2% pace next year despite a sluggish start from materially discouraging fiscal retrenchment before improving to 2.4% in 2012. The pound might have been expected to jump on the news but there was no follow-through to an initial move to $1.5577 and the pound has eased to an unchanged $1.5530.

Japanese yen – The yen recently rose to ¥83.66 as the dollar lost ground. Meanwhile, against the euro, the Japanese unit rose to ¥110, which is still well above the end-November panic lows at ¥108.35. The yen is also rallying against the British pound to ¥130.02.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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 Wilkinson

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. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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