Euro sees rough start as risk aversion explodes

The week got off to a rocky start with investors scrapping to buy dollars after taking a dizzying look at several swirling undercurrents that emerged over the weekend. Signs of a global slowdown continue to feed through weaker commodity prices with a dip to a 10-month low for a key Chinese gauge generating fresh worries on Monday. And while Greece had been the burning Eurozone issue throughout the past week a punishing round of municipal elections in Spain saw the ruling Socialist party suffer its biggest setback in three decades. Fresh fears over larger peripheral nations have come to the fore and as investors stare into the vortex they are uncomfortable with what they see in the waters below.

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Euro – It’s a shoddy start for the single euro currency, which earlier fell below $1.4000 for the first time since March 18, and remains weaker by 1% to start the week. The Eurozone took a bashing from just about every angle starting ahead of the weekend when S&P downgraded the prospects for Italian government debt on account of diminishing prospects that debt reduction could be assured. Spain’s Socialist leader Zapetero was roiled badly at the weekend’s elections trailing the opposition by 10% and gaining just 28% of the vote. Fears are gaining that with rising unemployment in the non-core Eurozone nations whose governments are sporting fiscal hair-shirts, pressures are only likely to grow. Many have thrown in the towel on expecting Greece not to default on its debt with others suggesting preferential treatment for Greece would be pounced on by Portugal and Ireland sending contagion fears spiraling fast at the outset of the week. Further concern was spread by the release of the Eurozone PMI composite index, where a 55.4 reading marked a faster slowdown for core Europe. Both individual manufacturing and services index readings fell beyond forecast as German performance really came off the boil as alluded to by the Bundesbank last week. The euro currently buys $1.4031 having rebounded from $1.3969 earlier.

U.S. Dollar – The dollar index reached its highest in nine weeks as investors traded out of riskier positions favoring the sanctity of the greenback instead. Technicians looked back to April 1 to see the last time the dollar traded as high as 76.37 against a basket of its major trading partners. The benchmark MSCI Asia Pacific index shed 2.1% while Shanghai stocks slid to the weakest reading since February following a private reading of Chinese manufacturing. According to the HSBC manufacturing PMI index growth within the sector virtually came to a standstill in May where the reading dipped to 51.1 and its least in 10 months.

Canadian dollar – The Canadian dollar continues to trade on the weak side with investors earlier pushing the unit below last Tuesday’s session low at $1.0206 U.S. cents. Fears of a global slowdown have weighed on the Canadian dollar from two angles. Weaker demand forecasts inherently plays through to slowing demand for its minerals and raw materials. Sliding crude oil prices also reduces the transactions cost for the unit. Weakening commodity prices also pulls the rug from beneath the threat of inflation, depriving the loonie of incremental speculative demand that typically appears when investors are banking on central bankers to improve yields.

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