Euro continues to weaken as rift with periphery grows

The dollar is once again making the running in early foreign exchange action as investors increasingly rely on what they already know. Core Eurozone activity is performing well while the ability of surrounding nations to convince investors in the coming months and years that they won’t default on debt obligations remains a key concern. In the meantime traders are reminded on a daily basis of the improving health of the dollar economy.

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U.S. Dollar – The greenback continues to build on midweek gains inspired by the strongest reading for an ADP report since record-keeping began in 2001. On Thursday initial claims data is expected to show a rebound from a dip to a two-year low. Economists have already boosted estimates for Friday’s crucial non-farm payroll number. This morning the dollar index has risen to 80.42 (+0.2%) as data in other regions continues to detract from dollar alternatives.

Euro – A Daily Telegraph report in London notes that EU leaders are set to continue talks that would spread the cost of banking failures across its senior bondholders. The prospect of further losses for Eurozone investors is therefore weighing on the euro, which reached a one-week low at $1.3090 this morning. Additional data also showed a shortfall in retail sales during November in the region with a 0.8% decline leaving sales for the year higher by the slimmest of margins at 0.1%. Consumer confidence continued to slump region-wide dashing expectations of a recovery last month. The consumer confidence index fell further to -11 after -9.4 in November. However, an index of economic confidence rose to its highest in more than three years with a reading of 106.2 after 105.1. Separate reports showed a rise in manufacturers’ fortunes while the service sector came off the boil marginally. Supporting the buoyant mood among German industrialists was a surge of 20.6% year-over-year in orders for factory goods during November as the monthly reading jumped by 5.2%. The euro remains just above $1.3105 this morning ahead of U.S. data.

Japanese yen – The dollar remains relatively firm after its midweek surge against the yen and despite testing its resolve earlier it buys ¥83.16 having reached ¥83.39 yesterday. Asian currencies remained firm for the most part although there was some chatter over the potential for regional central banks to act to stem either export-inspired growth or to tackle the resultant rise in the value of domestic currencies. The yen reversed midweek losses against the euro to trade 0.5% higher today at ¥108.97 while it also rose to ¥82.90 per Aussie dollar.

British pound – A sharp recovery in the pound was dampened swiftly by a surprising contraction in the PMI services index, which fell to 49.7 and below expectations for ongoing expansion. Readings below 50.0 indicate contraction while those above show expansion. The contraction was Britain’s first since April 2009 and several have been quick to point out that the country’s worst snowfall during December since 1993 could be the culprit. We certainly got a taste of that earlier in the week when the construction sector unexpectedly did the same while the data contrasts with a reinvigorated manufacturing sector. Since the report and as investors begin to sense that all is not as bad as it seems the pound has attempted to regain $1.5500. The euro also cheapened against the pound to 84.50 pence.

Aussie dollar – The Aussie put in a two-week low, although the pace of decline appears at a glance to be softening. Premier Anna Bligh told the Australian Financial Review that the cost of damage from the floods that swept across Queensland may reach A$5 billion. The unit fell to 99.46 U.S. cents before recovering to 99.72 cents. Building approvals fell 4.2% for the third month in four dipping 4.2% following a downwardly revised 8.3% drop in October.

Canadian dollar – As noted in yesterday’s commentary, the Canadian dollar is a big beneficiary of recovery in the United States. Today the unit continues to trade above par with the greenback currently fetching $1.0069 U.S. cents. Earlier in the week the unit received support from a repeat 0.5% gain in industrial production for November matching the October report. Today a measure of business and government spending is expected to show expansion at a lesser pace although would support the growth theme in Canada.

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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