The US dollar fell against nine of the G10 currencies overnight as investors flocked to safe-haven assets other than the USD. While the buck has gained on heightened risk aversion in the past 18-months, skyrocketing commodity prices have the dollar on the defensive this morning. With oil production in Libya, Africa's largest exporter of crude, beginning to slow as the country teeters on the brink of civil war, prices have spiked, topping $100 for the first time since 2008. With the inverse correlation between crude prices and the USD remaining largely intact, rising oil prices will likely continue to weigh on the dollar. The flight to safety has also prompted a fall in US Treasury yields, further reducing the greenback's appeal as a higher-yielding alternative to other safe-haven instruments like the JPY. However, the US economy continues to show signs of life with weekly jobless claims besting forecasts by falling to 391K from 410K last week, and better than the 405K expected. Durable goods orders also showed positive growth after last month's unexpected decline. New home sales however missed the mark, falling to 284K, short of the 305K expected, and down from 329K last month. The house price index also took an unexpected step back, showing that prices declined 0.3% last month, highlighting the continued weakness within the housing market that is eroding US household purchasing power. With the mixed economic data, and the market's dual focus on both risk aversion and rising commodity prices, the USD will struggle to gain its footing this morning.
The EUR pushed within ten pips of its recent highs this morning as oil prices surged yet again. A surprisingly strong reading of European economic confidence has also bolstered the common currency as the gauge increased to 107.8, the highest level since September 2007. German exports also showed strong growth, advancing 2.5% in the final three months of last year, beating expectations of a 1.1% gain. German CPI increased by 0.5% in February after falling 0.4% last month, further supporting the recent hawkish tone from the ECB. However, with a particularly large issuance of Italian government bonds due today and tomorrow, and with investors shunning risky assets in light of continued unrest in North Africa and the Middle East, rising yields on government bonds in the PIGS has investors again worrying about debt default. As markets weigh rising commodity prices and uncertainty over the ECB's forthcoming policy decision, the common currency will likely remain relegated to its recent ranges, albeit the higher end.
The CHF and JPY both gained overnight, with the franc rising to a record high against the USD. The two currencies have seen substantial demand as investors seek relatively safe investments with continued unrest in Libya and Bahrain. While protestors appear to have taken over much of Libya, long-standing dictator, Muammar Qaddafi, and his loyalists sought to crush dissent in the capital city of Tripoli in deadly clashes. While investors are concerned about the immediate impact the protests will have on oil production in the OPEC member, they are also worried that rising energy prices could hamper the global economic recovery. Falling Treasury yields in the US have also eroded the dollar's yield advantage over both the franc and yen.
Sterling took a modest step back against the USD this morning while falling to a three-week low against the EUR on concerns that rising oil prices may derail the country's nascent economic recovery. The clear divide amongst BoE policymakers has also encouraged investors to pare their bets that the Bank will tighten policy in March. Policymaker David Miles told reporters that officials should not rush to raise rates to prove they are tough on inflation as forecasts only warrant a very gradual tightening. Further weighing on the pound is a forecast of British retail sales for March predicting no growth.
Commodity currencies continued to strengthen as oil, gold and copper all pushed higher. Gains in the AUD, NZD, CAD, ZAR, MXN, etc. have, however, been tempered by the potential for slower global economic growth with rising energy prices in particular potentially stunting demand. The CAD was the biggest gainer of the group as improving labor data in the US has encouraged investors that demand for Canadian exports will continue to grow in 2011. The NZD rose for the first time in nearly a week, but remained towards the lower end of its recent ranges as Christchurch digs out from a devastating earthquake. The AUD also pushed higher with investors optimistic about the Australian economy. A Statistics Bureau report showed that mining companies plan to invest $100B in Australia in the coming year, up by roughly 95% from last year. While rising commodities provides obvious support, gains will likely be tempered by speculation that rising prices could hamper demand for exported raw goods.
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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.