The US dollar rose as investors abandon risky assets amid fears about the global banking sector, ahead of the US corporate earnings season. Investors wait cautiously for the earnings of Alcoa, the aluminum manufacturer, to kick off the earnings season.
The euro weakened against the dollar as the Euro-Zone Gross Domestic Product declined 1.6% in the fourth quarter. This was the deepest quarterly fall for the Euro-zone GDP ever. The euro also came under pressure as European Central Bank Executive Board member Jurgen Stark criticized the International Monetary Fund’s special drawing rights. The SDRs were discussed in last week’s G20 meeting, where wealthy and emerging economies supported the allocation of $250 billion of SDRs for countries that are hit particularly hard by the financial crisis. Stark described the creation of the SDRs as “helicopter money” for the globe, and that there was no examination on whether the extra liquidity was needed. Analysts said the comments suggested that inflation fears still remain at the ECB and that dimmed the prospect that they would offer a line for beleaguered economies in central and eastern Europe.
The Sterling fell against the dollar after weak UK data and a fall in domestic equities showed a retreat in risk appetite. Figures showed that UK manufacturing output fell 0.9% in February, marking the 12th consecutive month of declines. Investors expect the Bank of England to keep interest rates at a record low 0.5%, during their policy meeting on Thursday.
The Japanese yen strengthened as investors became risk averse amid fears of the global banking sector. The Bank of Japan announced that is was leaving interest rates unchanged at 0.1%, which was widely expected. The BOJ also unveiled further steps to ease credit by lending against a wider range of municipal debt to support regional banks.
The Canadian dollar dropped to its lowest level against the dollar since last week as oil prices weaken due to concerns about the health of the global economy. Oil fell to the price of $50 a barrel as weak Euro-zone GDP data signaled that demand would continue to stay reduced. There is no Canadian data due today, and the currency will likely follow the price of crude oil as it is Canada’s largest export.
The Australian dollar rebounded on Tuesday after touching lows in light of news that the central bank cut rates less than expected. The 25 basis points cut by the Reserve Bank of Australia dropped the key cash rate to a record low of 3% but was less than the 50 basis point reduction expected by many and opens the discussion for further easing in the future. The New Zealand dollar slid on Tuesday against the US dollar as fears about the global banking sector prompted investors to seek the “safe haven” greenback and unwind trades in higher yielding currencies like the kiwi. Increased caution and risk aversion ahead of the U.S. corporate earnings season looks to put further pressure on the New Zealand dollar over the next few days.
10-Year Treasury Note Yield: 2.493%
Dow Jones Industrial Average: 7,852.56 – 123.29