The US Dollar dropped against nine of ten most actively traded currencies overnight as continued unrest in North Africa and the Middle East has investors shedding risky positions. While risk aversion usually benefits the dollar due to its global reserve status, rising crude oil prices have prompted investors to seek the safety of the JPY, CHF and gold instead. Oil spiked back above $100/bbl as pro-Qaddafi forces bombed rebel camps near the Libyan capital of Tripoli, and protests intensified in Oman, Yemen and Iran. The dollar has also come under pressure as Fed Chairman Bernanke makes his case for continued accommodative monetary policy before the House of Representatives. While the ECB and BoE appear to be gearing up for higher rates to combat inflation, Bernanke has repeatedly warned that higher rates would be detrimental to economic growth in the US and that price pressures remain largely in check. Investors also took note of the ADP jobs report this morning, which beat expectations with a gain of 217K versus the addition of 180K anticipated. However, the Challenger job cuts report showed that reductions in last month were up by 20% from a year ago. Layoffs at the public level were blamed for the rise as federal, state and local governments tackle ballooning debt. Equally alarming was that the second largest source of layoffs last month was in the retail sector as the dismissal of government workers may weigh on consumer spending. Combined with rising prices at the pump and in the grocery store, the threat of a slowdown in spending may be prompting retailers to begin cutting back on payrolls.
The EUR gained this morning as investors speculate that the ECB will hike interest rates sooner rather than later. While most don't believe there is much of a chance that the Bank will hike rates at tomorrow's meeting, the market is expecting a hawkish tone to ECB President Trichet's announcement. Adding more fuel to the fire, Eurozone PPI registered 1.5% last month, beating the 1.1% expected, and nearly doubling last month's 0.8%. With crude oil's 33% gain over the past six months, companies have been under increasing pressure to pass on rising costs to consumers as labor unions demand more pay. A number of ECB members have been outspoken about their willingness to raise borrowing costs, but worries over Euro Zone debt do persist. Portuguese debt auctions held yesterday attracted only half the number of investors as last month, and it appears to be a foregone conclusion that the third PIGS nation will request an EU-IMF loan in the coming weeks. For the time being, the common currency will likely remain well supported, and even test the higher end of its ranges on expectations of a higher benchmark rate.
Sterling gained this morning after an industry report showed that UK construction grew at the fastest pace in eight months. Despite the disappointing reading of Q4 '10 GDP last week, investors have begun to price in higher interest rates in the UK with strong economic reports suggesting that the BoE will tighten policy to combat rising prices. Inflation has now outpaced the Bank's benchmark 2% level for 14-consecutive months, but BoE Governor Mervyn King continues to insist that the price pressures will be temporary. The pound will likely continue to push higher in the near term, but gains may be short-term with the UK economy threatening to slip back into recession.
Commodity currencies were the biggest gainers overnight excluding the NZD. With oil pushing back above $100/bbl, and with strong economic fundamentals in the US, the CAD has seen significant support. The AUD remains within its recent ranges, as investors still expect the RBA to raise interest rates in the second half of 2011 despite the costly recovery from devastating floods earlier this year. The ZAR was the best performer of the group, gaining nearly 2% against the USD as gold pushed to a record high of $1438.80 and investors have begun to anticipate that the South African central bank's policy will turn from accommodative to restrictive in the coming months. The NZD on the other hand, fell to its lowest levels of the year after Prime Minster, John Key, said that he would welcome an interest-rate cut to jumpstart the economy following the devastating earthquake in Christchurch. The kiwi also dropped to its lowest levels in nearly two decades against the AUD as investors increased bets that the RBNZ will ease borrowing costs.
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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.