The US dollar rose against most of its major counterparts last night on speculation that unrest in Egypt may worsen, supporting the dollar as investors seek its relative safety. The dollar is headed for a third weekly gain against the EUR, after Egyptian President, Hosni Mubarak, stepped down. The December reading of the US Trade Balance showed that the trade deficit widened for a second month in a row as the cost of imported oil climbed to a two-year high. The gap grew to $40.6B, in line with the expected $40.5B reading, and up 5.9% from the previous month. For 2010, the gap surged 43%, the biggest gain in a decade, as a recovery in consumption led to record imports of consumer goods. A separate report showed that consumer confidence jumped to an 8-month high with the U. of Michigan Confidence report registering 75.1, up from 74.2 last month. The recent gains made in the labor market and rising stock prices appear to be comforting US households.
The Egyptian President has left Cairo for the seaside resort town of Sharm el-Sheik, and transferred power to the nation's Vice President. However, with the shift in power, the focus on the Egyptian military has intensified, as their allegiance to the current regime appears to be tenuous. In an attempt to appease irate protestors after Mubarak's refusal to step down, the army has announced that it is prepared to lift Egypt's emergency law as soon as conditions allow. The current emergency measures that have been in place since former President, Anwar Sadat, was assassinated three decades ago, and allows the police to detain people without charges, bars unauthorized assembly and restricts the freedom of speech. However, with current demonstrations threatening to erupt into violence, investors will remain on edge until a viable replacement for the current administration is instated in Cairo.
The euro declined this morning to the lowest levels in nearly a month, before paring those losses and gravitating back towards the 100-day moving average of 1.3541. Investors have sold the common currency for the past two days as demonstrations in Egypt intensify, prompting investors to shed riskier positions and seek the relative safety of the USD. ECB hawk, Axel Weber, has also resigned from his post as the President of Germany's Bundesbank. He was the front-runner to replace ECB President Jean-Claude Trichet. Trichet will step down in November, and the most likely replacements now are Draghi of Italy, Mersch of Luxembourg or Liikkanen of Finland. With such uncertainty over the ECB's likely policy direction beyond November, investors are pairing bets for steep rate hikes.
Sterling has come under pressure this morning as expectations of higher British interest rates are sidelined, at least for the time being. The BoE surprised no one when they left interest rates on hold yesterday, but a continued dovish stance from the bank dashed speculators hopes that high inflation would force the Bank to act sooner rather than later. BoE Governor, Mervyn King, has repeatedly dismissed inflation risks as temporary, saying that government austerity measures and slow economic growth will curb price pressures in the medium term without the help of higher interest rates. A higher than expected reading of PPI this morning provided little support for the GBP, as it broke through key support, and may likely move back towards the lower end of its recent ranges.
Commodity currencies have been quite volatile this morning after an announcement that Egyptian President, Hosni Mubarak, has officially ceded power to the nation's Vice President. Oil prices have tumbled below the $87 level for the first time in nearly two weeks, threatening to extend its losses below the 85.50 barrier last reached in November 2010. The AUD slipped to its lowest levels in a month, and threatened to break below parity with the USD on the volatility in commodity prices. The CAD on the other hand, has gained by nearly a percent this morning after the number two North American economy unexpectedly posted its first trade surplus in 10 months. A rise in energy and metal prices and export levels jumped by the most since 1982 as global consumption expanded and unrest in the geopolitical unrest caused prices to rise. Canadian officials have been proactive in protecting the competitiveness of their exports, which has been impaired by a strong currency. Canadian Finance Minister Jim Flaherty has said that corporate tax cuts will encourage companies to invest in labor and expansion in order to boost productivity. However, Canada's Liberal Party says that the money being left on the table would be better spent on education and social programs, setting up a political showdown when PM Stephen Harper's Conservative Party attempts to avoid a forced election this March.
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This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.