Dollar and euro strengthen against yen

IB FX Brief: Euro weakens as Germany wins late night discussion

Currency markets seem to be paying scant attention to news of a possible radiation leak ahead of the weekend after Japanese nuclear regulators said a reactor wall had cracked. The dollar is stronger to end the week although news of the possible radiation leak is surprisingly not causing concern for equity traders who continue to push U.S. equity futures higher. Meanwhile, the less cautious tone has coincided with a break to a fresh weekly high for the dollar against the yen. One might have expected the opposite impact if risks are higher. It seems that investors are happy to paper over the cracks.

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Euro – A late night showdown in Brussels resulted in German Chancellor Angela Merkel getting her way as she argued down the capital commitment from taxpayers. Only last week it appeared that nations would be required to stump up €40 billion over three years to back the stability fund. Last night Ms. Merkel successfully argued that members put in €16 billion over five years. The euro declined when the news broke as jittery investors grew more concerned about the ability to stave off future sovereign debt implosions. The single unit slid to $1.4140 before recovering and following a strong close to trading last week appears set to end the week unchanged. The euro rose to ¥115.13 against a weaker yen.

U.S. Dollar – The dollar made a break higher against the yen after literally flat-lining for the entire week. The last several days have been marked by subsiding fears over the potential danger to Japan, in turn alleviating speculators’ desire to retest the conviction of G7 central bankers resolve to prevent the yen from strengthening. The dollar is slightly higher on an index basis at 75.79 ahead of an update on fourth quarter GDP on Friday. Analysts expect an upwards revision to the annual pace of growth to 3%. The Fed yesterday announced that it would hold quarterly press conference calls, which will help it more effectively communicates its thought process. Don’t expect that news to turn the greenback anytime soon. The dollar continues to suffer at the hands of growing risk aversion and a low likelihood that the FOMC will step up to tighten monetary policy as other central banks are doing to tame inflation.

Japanese yen – The yen fell to its lowest level of the week at ¥81.37 as the dollar jolted into action. The growing return of risk appetite, evidenced by a 1.1% rise in the Nikkei overnight, reduces the need by the G7 to intervene again. Pressure on the yen is thereby falling by the wayside and could easily see the dollar spike next week. Adding to the more positive tone was a weekly government release showing that overseas investors poured the most in seven years into Japanese stocks as the Nikkei melted in the week ending March 18. Investors bought ¥891 billion of its domestic equities and ¥190 billion in government and corporate bonds last week.

British pound – Where the yen lacked in volatility this week, the pound more than made up for as it headed for the biggest weekly decline in a month. Against the dollar the pound has recoiled from $1.6400 to $1.6050. Hopes during the week have subsided for a yield-boosting interest rate increase as investors continue to battle with evidence of a weakening growth profile and a huge miss on the inflation front relative to the Bank’s target. Weakness in retail sales, a downgrade to growth and a preparedness to “wait and see” as revealed in this week’s policy-setting minutes have many hawkish speculators dropping their prey. Against the euro the pound remains unchanged on the day at 87.94 pence.

Aussie dollar – The MSCI Asia Pacific stock index rose by 0.6% overnight as investors crept back into riskier plays dragging the Aussie higher in its wake. The unit rose to $1.0250 as stock market implied volatility sank as fears that the Japanese news flow might worsen deteriorated.

Canadian dollar – The Canadian unit clung to gains having traded at a two-week high on Thursday at $1.0269 U.S. cents. This morning ahead of a U.S. GDP revision and the latest reading of consumer confidence from the University of Michigan, the loonie has given back some of its gains to stand at $1.0240. There is no scheduled economic news from Canada today.

Andrew Wilkinson

Senior Market Analyst

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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