The dollar is lower against the EUR after German Chancellor Angela Merkel assured President Obama that Eurozone officials will resolve their debt crisis in due time after the ECB signaled its approval of Greek bond rollovers. With the Fed widely expected to keep interest rates at their current low levels, the dollar will struggle to gain despite continued claims from the Administration and the Treasury that they support a strong dollar. Futures traders are currently pricing in a 0.25% hike in interest rates with a mere 16% probability between now and next April. For the day ahead, expect the dollar to struggle against its higher yielding counterparts with markets squarely focused on Bernanke's speech later this afternoon.
The EUR pared its losses from yesterday and more as European officials appear to be nearing a compromise that would avert a debt default in Greece, at least for the time being. For the first time, ECB President Trichet indicated that he would approve of financial institutions maintaining their level of outstanding Greek credit by buying new Greek bonds to replace maturing securities. While the debt "reprofiling" may serve as a temporary Band-Aid, Greek officials are struggling with domestic unrest as they force through austerity measures. Without significant progress in moving towards a more balanced economy, the ECB measures may only be prolonging an inevitable Greek default. Nevertheless, with the debt situation on hold for the time being, investors have turned their attention to the common currency's relatively high yield with a speech from Fed Chairman Bernanke and an ECB policy meeting later this week expected to highlight the Banks' divergent policies.
Sterling rose this morning against the dollar and yen, but fell against the EUR as investors' risk appetite gained on signals that a credit crisis may be diverted in the Eurozone. The pound also gained against the dollar for the third day in four after data showed UK home prices rose 0.1% last month, following a 1.4% decline in the previous month. However, the pound remains relatively weak overall, touching its lowest level on record against a measure of G10 currencies as PM Cameron pushes through the largest spending cuts since WWII. The BoE meets on Thursday but no change in policy is expected.
The JPY moved away from the top of its recent ranges this morning, but remains near a 1-month high. The spread between 2-Yr US and Japanese notes has shrunk to the least this year, driving gains in the yen to near record levels. The shrinking gap has reduced the appeal of US debt for Japanese investors, which in turn has pushed the yen ever closer to the key psychological 80 barrier. With the potential for further monetary easing in the US as the economy struggles to gain traction, the BoJ too may soon look to expand its asset purchase programs, and potentially intervene in currency markets again should the yen appreciate further.
The Commodity Currencies are generally stronger this morning on a renewed surge in risk appetite. However, raw goods are in the red with oil dropping to $98.34/bbl, gold at $1541/oz, and copper at $413/lb. The AUD is relatively flat after the RBA failed to encourage investors. The Bank held interest rates steady at 4.75%, as was expected, but more importantly signaled that current policy is "appropriate", suggesting that future rate hikes are likely further off than most investors anticipated.
The CAD gained for the first time in three days as investors sought higher yields, encouraged by rising equities. However, gains in the loonie were tempered by the lower price of oil, the nation's primary export. The ZAR was the best performing major currency against the dollar overnight as the gains in the EUR, the currency of South Africa's main trading partners, rallied. A report from the RBSA also showed that currency reserves fell for the first time in five months, primarily due to a monthly gain in the USD in May, thus eroding the value of their EUR, GBP and JPY holdings.
06/07/2011 | CURRENT | CHANGE FROM CLOSE |
| EUR/USD | 1.4670 | -0.64% |
| USD/JPY | 80.20 | 0.12% |
| GBP/USD | 1.6445 | -0.54% |
| USD/CAD | 0.9750 | -0.61% |
| USD/MXN | 11.7316 | -0.13% |
| USD/CHF | 0.8386 | 0.48% |
| AUD/USD | 1.0711 | 0.02% |
| NZD/USD | 0.8205 | -0.73% |
| USD/CNY | 6.4810 | 0.10% |
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