The euro remains under pressure at the end of a week in which the dollar has slumped broadly. Suggestions of a Greek debt restructuring on Thursday sent fear across European dealing desks only for the single currency to stage a miraculous rebound late in the day. On Friday the Greek government is busy sharpening its pencil and talking seriously about spending cuts instead of negotiating a haircut for bond holders. The negative tone to risk emanated earlier in the session after a rebound in Chinese growth was accompanied by fears over further remedial policy action from Beijing.
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Euro – Greek Prime Minister told cabinet ministers that the structural problems faced by Greece can’t be solved “by restructuring its debt but by restructuring the country.” Mr. Papandreou noted that even if the wave of a magic wand suddenly made the deficit disappear today it would reappear within two years on account of the structural problems facing the economy. The government is preparing to announce budget measures today that will help reduce the deficit as a proportion of GDP to 3% within three years. This is a requirement of the EU and IMF according to last year’s agreement that provided Greece with €110 billion in emergency funding. The euro remains weak this morning and at $1.4450 is towards its lowest point of the session. Also weighing sentiment down is a Moody’s downgrade for Ireland dragging its rating to the lowest investment grade. The ratings agent warned there may be further cuts. The euro lost ground to the Japanese yen and buys ¥120.50.
Japanese yen – The yen again improved versus the dollar overnight and for the second day briefly broke below ¥83.00. It last traded at ¥83.32. Finance Minister Noda said he’ll continue pushing for coordinated currency patrols to curtail excessive market volatility at Friday’s Washington meeting of finance officials in Washington. The politician predicted that the Japanese economy and financial markets would remain resilient after the recent disasters. Bank of Japan Chief Shirakawa predicted a return to expansion for the country by the third quarter. Data proved the economy prior to recent natural disasters was recovering well under remedial policy settings with February industrial production rising to a 2.9% annual pace of expansion. The yen also rose against the British pound and the Aussie dollar to end the week.
Aussie dollar – The Aussie weakened overnight over fears that the pace of activity within the Chinese economy will shortly lead to further restrictive policy settings. There was even talk of an increase in either interest rates or reserve ratios as early as today and after Chinese markets had closed. The Aussie currently buys $1.0525 U.S. cents and weakened in light of accelerating Chinese inflation to its highest in two years at 5.4%. Producer prices also grew during March while industrial production also accelerated. According to State data released overnight the economy grew by more than was expected in the first quarter at a rate of 9.7%. The weakness in the Aussie unit must be worrisome for the number of speculative longs that recently established record bullish positions according to last week’s CFTC data.
Canadian dollar – The Canadian unit continues to decline more so on growth concerns than when it rallies as risk aversion is cast aside. As yet there are few clues over how long this situation will last nor what the outcome will be. It’s difficult at present to predict the next break in either direction given resilient economic optimism pitted against the potential for ongoing corrective price action for commodities. The Canadian sagged Friday against the greenback to buy $1.0365 U.S. cents.
British pound – The pound’s earlier advance wilted and the unit is back to unchanged on the session at $1.6350. In a Bloomberg television interview Bank of England policymaker Andrew Sentance warned that the recent dip in inflation may well prove to be short-lived. He said that he wouldn’t turn his nose up at a currency-boosting rate increase given inflation is yet expected to reach 5% later in the year. The euro shed some ground against the pound and last bought 88.40 pence.
U.S. Dollar – The dollar index continues its acceleration away from a 16-month low induced by fears that the Fed is unlikely to respond to what it sees as transitory inflationary pressures. The situation seems destined to remain that way unless commodity prices correct further in coming weeks following a spate of warnings over the likely harm rising prices will thrust on consumption and inflation. The index gained to 78.80 as the dollar made headway against a deficit-riddled euro, the beleaguered yen and a pair of out-of-favor commodity dollars. Later on Friday the dollar does battle with a slew of data including consumer price and industrial production.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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