Open season on the dollar continues to keep the bulls at bay. A top Chinese official stumbled across portfolio theory and warned against the danger of failing to diversify. German Chancellor Angela Merkel apologized in advance to President Obama for an increasing hotel bill during his European tour now that she has the debt crisis firmly behind her. The Australians left monetary policy on hold as the central bank highlighted tougher conditions facing the non-mining sector.
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Euro – Ms. Merkel told the President that she believes the euro has the sovereign debt crisis firmly behind it according to a spokesman, helping lift the single currency to a one-month high against the dollar. Meanwhile, ECB Chief Trichet indicated that the central bank would cooperate with a plan to allow Greek creditors to rollover debt at maturity. This would help Greece avoid a funding squeeze and would come perhaps at the cost of conditions floated last week including a higher coupon rate at rollover and collateral to be held by the debt holder. The euro rose to $1.4682 as investors warmed to the apparent success of recent negotiations and as they readied for Thursday’s ECB meeting at which it’s becoming increasingly expected that the ECB will prime the market for a July rate increase. Eurozone retail sales jumped during April according to a report Tuesday. Sales across the 17-nation area rose 0.9% after falling as much in March. Compared to one-year ago sales rose by 1.1%. Also convincing investors that the ECB wants to get back into its nascent monetary tightening process was a report showing German factory orders jumped by 2.8% in April.
U.S. Dollar – A Chinese foreign exchange official warned against focusing on dollar-denominated investments in a widely reported story Tuesday that is helping depress the dollar. The dollar index fell to 73.70 for a 0.4% decline on the day. The State Administration official warned against the economic and political risks of holding too many dollars and has been taken by many to assume that China may diversify its vast foreign exchange holdings. The official also proposed widening the yuan’s trading band. The dollar remains broadly lower as investors fear that the weaker economic outlook will keep anything else with a higher yield better-supported.
Aussie dollar – The statement accompanying the Reserve Bank of Australia’s decision to leave interest rates static at 4.75% has kept some pressure on the local dollar in its aftermath. At the time of the May 2 Quarterly Report investors were encouraged to believe that higher yields were ahead when the Bank stated that rates must rise “at some point.” Such language was absent from today’s policy statement with the central bank casting the spotlight on the non-mining sector where investment prospects are lower than the record amount of projects flooding towards mining and energy companies. Investors sold the Aussie back to $1.0674 U.S. cents as they wiped expectations for a three-quarter interest rate increase off the agenda.
Japanese yen – Finance Minister Yoshihiko Noda caught dealers’ attention when he said he was again watching the forex market as the yen strengthened. Some are growing concerned over the yen’s strength and expect the Bank of Japan may intervene. However, Mr. Noda said that the stronger yen probably had resulted from perceptions over the weaker U.S. economic outlook. On Tuesday the yen eased to ¥80.33 against the dollar and was hardly influenced by in-line readings for activity gauges released today. The April coincident index rose marginally to 103.8 while the decline in the leading index to 96.4 was hardly worse than predicted. The yen remains weak versus the euro, which today buys ¥117.57.
British pound – The pound had little to influence it beyond a Halifax house price report and was dragged up against the dollar by the strength of the single euro currency. The Halifax building society said prices around the country rose by 0.1% leaving the three-month rate lower versus one-year ago by 4.2%. The pound rose to $1.6472 and against the yen rallied to ¥131.77. The pound eased per euro to stand at 89.19 pence.
Canadian dollar – The weaker greenback prompted a rally in the Canadian dollar, which rose to as high as $1.0265 U.S. cents in earlier New York trading. Dealers warmed to the Canadian unit following yesterday’s pledge by Finance Minister Jim Flaherty who said the nation’s finances should return to surplus by 2014.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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