The US dollar continues to plummet against the euro, falling to 2-month lows, which have also dragged it down against its other major trading partners. The euro has gained more than 1% against the dollar since the start of year, driven by growing expectations that euro zone policymakers will arrive at a more durable solution to the peripheral debt crisis and a hawkish ECB, which last week warned about price pressures.
Expectations of a strengthened euro zone rescue fund and a strong German Ifo business confidence report supported the euro, along with a more hawkish outlook from the European Central Bank recently, but debt concerns still weighed. Furthermore, Asian sovereign demand and improving confidence in the euro zone is driving the euro higher, though doubts remained whether the euro can hold onto gains.
The British pound weakened slightly against the USD and fell against the euro after a weaker-than-expected reading of UK retail sales which suggested sluggish consumer demand and highlighted the fragility of the economic recovery.
Data showed December retail sales were flat on the year, the weakest change since January 2010 and the worst annual performance for any December since records began in 1988. Forecasts had been for a 0.9% rise. Sales fell 0.8% on the month, reversing a rise in November and also coming in lower than economists' forecasts for a 0.3% decline.
While market participants acknowledge the volatility of the data series, it put a slight damper on speculation the Bank of England may raise rates in May.
The Japanese yen remains range bound against the USD, garnering strength as the dollar is pummeled by the euro.
A combination of higher commodity prices, expectations of tighter monetary policy by the Bank of Canada and a brighter economic outlook has driven the Canadian dollar to a 2-1/2 year high on the U.S. dollar.
The Bank of Canada may have sounded a less hawkish tone than some had been anticipating when it kept interest rates on hold, though many analysts still see a rate hike coming in the first half of the year.
The Australian and the New Zealand dollar reached a multi-week low against the USD as commodity prices plummeted. The kiwi was hurt by benign inflation data which led some investors to cut expectations of near term interest rate hikes.
The Australian dollar erased most of its losses against the USD in a dramatic mid-session turnaround after a 2% rally in Shanghai stocks took the sting out of worries about more tightening by China. The New Zealand dollar also pared losses, but struggled to make any headway after an unexpected drop in a measure of core retail sales bolstered views the Reserve Bank of New Zealand will be in no hurry to lift interest rates.
China is a top trading partner for both Australia and New Zealand and their currencies are sensitive to fears of a slowdown there, even if most analysts consider the concerns overblown.
Markets will also keep its eye on ongoing fallout from Australia's recent floods. The government is currently estimating that the flood damage could cut over 20% of Australia's coal exports, pressuring the currency lower.
Indications of Overnight rates:
10-Year Treasury Note Yield: 3.432%
Dow Jones Industrial Average: 11,873.09 +50.29%
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.