The fact that a meteoric plunge towards default has been staved off for three more months has equally encouraged some optimism that the world's leading economy might soon pick-up. At the least, say optimists, the positive turn for the fate of Greece is one less reason to be bearish on the outlook for the United States. Risk aversion has consequently tapered off. Benchmark equity indices are striding forward from a dip in to the red for the year. Bond yields are rising from a seven-month low and investors are once again embracing the euro instead of the dollar. The reality is that nothing has changed in terms of the overall indebtedness of Greece and the chances are that investors will face the next challenge in September when finances are next examined ahead of phase six of its bailout loan.
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Euro – Yet more positive news for the single currency was being muttered from meetings in Berlin between banks, insurers and finance ministry officials. According to sources close to the discussions a statement will be made Thursday afternoon saying that a draft agreement to rollover maturing Greek debt held by financial companies is taking shape. The rumor drove the euro to its highest in three weeks against the dollar topping out at around $1.4519. The prospect of such an extension wipes one more layer of fear away from the sovereign debt crisis. Dealers also rallied around the euro ahead of next Thursday’s ECB meeting with most expecting the central bank to deliver its second interest rate increase in three years, widening its yield cushion against the dollar. Earlier in the week President Trichet leaned on the coded phrase of “strong vigilance” in describing the current mood at the central bank.
British pound – While most units continue to rally in a fourth day of gains against the dollar, the same can’t be said of the pound. It’s an exception to the general trend that we have seen during the last week or two in which risk-aversion pushed yields down in the expectation of further monetary easing. And now that the risk appetite is rebounding the afterglow of potential monetary easing is wearing off as normality resumes. However, the pound appears to be finding fewer willing buys and is attracting more sellers who recognize that even as a feeling of risk-on resumes, the British economy is in an increasingly bad place. A GfK consumer confidence report released Thursday slid with an increasing number of pessimists speaking out. The index fell to -25 from -21 and helped turn the pound from a gain against the dollar to a loss. Having reached $1.6119 the pound slumped to $1.5973 against the dollar. Against the single European unit the likely widening in yield differentials as a result of the forthcoming ECB meeting sent the pound to its lowest point in 15months. London bankers continue to push back the day of reckoning for British monetary policy. The euro currently buys 90.33 pence.
Canadian dollar – Despite a report showing that the monthly growth rate for the economy was unchanged through April the Canadian dollar advanced. The warmer risk waters made sure of that and besides, economists had predicted a minor decline for GDP output following the Japanese turmoil one month earlier. The unchanged reading means the Canadian economy grew at an annualized 2.8% pace led by a jump in metal ore and coal mining. The government said that retail and wholesale trade also rose. The loonie advanced to $1.0350 U.S. cents and the highest level in three weeks after the reading.
U.S. Dollar – Relief for Greece and with hopes running high for a bond settlement to be announced in Berlin, the dollar is still feeling heavy. Its index shed almost another 0.5% on Thursday and appetite for the dollar was further dulled by a sloppy reading for weekly initial claims. The jobless count eased by a mere 1,000 to 428,000 claimants but not only did the reading of continuous claims come in higher than forecast, but previously recorded data was also revised higher. The likely rate increase in Europe next week is also playing a role in maintaining a depressed dollar in the sudden absence of negative economic commentary.
Aussie dollar – The Aussie continued its rise as European tensions eased while a boost in credit during May helped remind dealers that the economy has been in decent shape. The Aussie traded to as high as $1.0750 U.S. cents after private sector credit rebounded by 0.3% last month leaving the annual pace of expansion at 3.1%.
Japanese yen – The yen rebounded against the dollar again overnight following strengthening reports on construction. Japanese housing starts increased by 6.4% year-on-year in May from a virtual standstill in April. Meanwhile construction orders were 25% higher in May than a year ago. The yen strengthened pushing the dollar down to ¥80.31.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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