Dollar down as investors eye riskier assets

It’s amazing what a drop of sunshine will do to sentiment. Investors returned from a long three-day weekend to find global equity markets surging on optimism that an advancing global economy will spur earnings while hopes spread that European leaders kicking the can down the road one more time will save blushes in Brussels and Athens. Latest CFTC data explains the dollar’s recent surge as a massive short-covering exercise while wrong-footing investors in the pound and the Aussie.

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Euro – Leaders from the IMF, the EU and the ECB are putting final touches to their progress reports for Greece as they assess its effectiveness in meeting the qualifying conditions laid out for last year’s €110 billion loan package. The EU will spend the next several weeks formulating its plan for a lasting solution for the cash-strapped nation and says it hopes to roll out details by the end of June. Reading between the lines, this is another way of saying that Brussels kicked the can down the road for old time’s sake. Investors concluded that the promise to rule out any debt restructuring must have the situation fully under control. In a huge sigh of relief, the euro surged versus the dollar to reach $1.4424 and a three-week high. The euro was further propelled by a glance over the shoulder at retail sales across Germany during April, which gained by 0.6% on the month for a year-over-year change of 3.6%. The data proved stronger than forecast on account of a negative revision for March sales.

U.S. Dollar – Earlier in May the dollar index slipped to its lowest point in two-and-a-half years before turning tail and vaulting enormously. The power of the rise appears to have at least scared some investors out of one-sided bets against the dollar. According to last week’s data from the CFTC, the number of wagers against the greenback fell to its lowest since January. In fact the only currency where investors raised the stakes was the Aussie dollar, which curiously is lower today. Meanwhile, speculators last week built on an earlier bet that the British pound would decline, yet once again the pound is off to the races bucking the trend today. The dollar is broadly weaker losing 0.4% on an index basis to stand at 74.63. Later in the week investors face the challenge of second-guessing the progress of the labor market. Due tomorrow is the ADP private-sector gauge of hiring, while Friday delivers the official government reading. The rate of unemployment last month rose to 9% and has been highlighted by the Federal Reserve as the one indicator where the recovery is failing to deliver.

British pound – The pound reached $1.6546 on Tuesday for its strongest reading since the dollar reached exhaustion point on May 3. There was little on the economic agenda to cause the pound to advance, yet this has been a theme since midweek when the pound began to flex its muscles and rise. The Land Registry today reported that home values rose by 0.8% during April leaving prices lower by 1.3% year-on-year. The pound was supported by a fifth consecutive day of rising equity prices on optimism for a solution for Greek woes. As the New York morning unwinds the pound has slipped back below $1.6500.

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