Dollar rebound short-lived

Earlier hopes for a rebound for the dollar in light of all round agreement to raise the debt-ceiling have fallen on rocky grounds as investors think back to Friday’s growth report from the U.S. While the debt-gridlock may have been broken, dealers are busy disentangling the mess leading up to Friday’s culmination of fears and recognizing that the risk-aversion tone happened with good reason. The short-covering rally for the dollar appears to have run its course in Asian and European time-zones while growing risk appetite as a result is being confined to an equity market rebound.

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U.S. Dollar – President Obama and congressional leaders agreed to raise the debt-ceiling by $2.1 trillion and cut the deficit by $2.5 trillion over a decade in the process. The relief was swift starting in Asian markets where stocks jumped, the dollar rebounded and Treasury prices pared gains. And the clue is in the final comment there – the 10-year yield rose to 2.83%, which still remains in below the recent lowest closing low for 2011 following data last week that showed the U.S. economy is not growing as fast as was believed to be the case. There may be relief from the deficit debacle, but the economic picture morphed last week presenting fresh challenges ahead for the dollar. Its index is once again under pressure to start the week trading softer by 0.2% at 73.68. Later on Monday the dollar faces the hurdle of the July measure of the ISM manufacturing reading expected to have eased marginally from 55.3 to 54.5.

Euro – The euro earlier responded to news of the proposed debt agreement with a decline to $1.4377 but more recently rose to a session high in New York at $1.4454. Although there are few willing to predict a further monetary tightening from the ECB when it reconvenes at its August session on Thursday the single currency maintains a yield edge over and above the dollar, at least when investors take an eye off concerns over the region’s debt concerns. The 17-member Eurozone’s PMI came in at an unchanged reading of 50.4 for July while that of Germany, the zone’s biggest member, took a minor back-step to 52.0 from 52.1 in June. The Eurozone’s unemployment rate was maintained at 9.9% according to a June report released on Monday. The euro rose to ¥110.85 against the Japanese yen.

British pound – The health of Britain’s manufacturing sector didn’t fare as well as that of other nations. The July PMI slipped back into contractionary ground at 49.1 and causing the pound to lose an early advantage over the dollar. The pound slid from a session high at $1.6472 to as low as $1.6377. The government’s efforts to solve its own budgetary problems haven’t gone unnoticed and the tight fiscal stance combined with low wage growth and a sticky inflation problem have caused a headache for retailers. The euro also gained ground against the British pound to exactly 88 pence.

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