v USD strengthens with the DXY reaching its best levels since September '10, in its continued role as a proxy for market risk appetite;
v EUR declines to fresh 15-month low against the USD as Fitch issues warning over Italy and Spain's credit ratings;
v GBP is the worst performing major currency overnight as the British trade deficit unexpectedly widened with reduced demand for British exports in the Eurozone.
The USD turned early losses into sharp gains against nearly all of its most actively traded peers. The dollar's rise comes in its role as a safe-haven asset as disappointing economic data out of Europe and foreboding comments from Fitch Investor Services has prompted today's flight to safety. With little data due out of the US, European woes are stealing the spotlight. While the dollar strength is expected to continue in the short term, a slowdown in Europe will surely have a severe negative impact on the US economy. While the notion has fallen by the wayside as of late in light of better than expected economic data out of the US, San Francisco Fed President John Williams told reporters yesterday that he sees a strong case for the new purchases of mortgage bonds. Given the view that inflation will fall below 1.5% this year, the rather proactive Fed may be closer to enacting a third round of quantitative easing than many suspect. Nevertheless, it's clear that the FOMC is far from consensus with Kansas City Fed President Esther George telling reporters this morning that more time is needed to judge the impact of the Fed's ultra-low interest rates. Both Williams and George are new to the Fed and will cast their first policy votes at the central bank's meeting later this month.
The EUR is weaker this morning, falling to a fresh 15-month low against the USD on renewed concerns over the region's debt crisis. Fitch also renewed the focus on a possible credit downgrade for some of the region's struggling members stating that both Italy and Spain face a significant chance of a downgrade by the end of this month. While not at imminent risk of a downgrade, investors are also fearful that Germany, the region's strongest economy, is on the brink of recession after industrial production slowed by more than expected in December. German GDP is still expanding at a 3% clip, but that is sharply lower than the 3.7% pace recorded a month earlier. In light of the softening economy and the ongoing funding concerns, investors will pay particularly close attention to next week's ECB meeting. While most do not expect the Bank to easy monetary policy this month, signs of future rate cuts and possibly a more formalized quantitative easing program will be looked for.
The GBP was the worst performing currency against the dollar overnight, shedding nearly a percent after a government report showed that the British trade deficit widened by more than expected. The trade gap widened to GBP 8.64B from GBP 7.87B in October as a fall in exports was compounded by a gain in imports. Slowed growth in the Eurozone, the main destination for British manufactured goods, is weighing on an already struggling British economy, prompting investors to increase bets that the BoE may enact more economic stimulus sooner rather than later.
The JPY is relatively flat against the USD this morning, but gained by nearly a percent against the EUR, approaching its all-time high reached earlier in the week. The move higher comes on the renewed concerns out of Europe and expected week data out of Japan. As global demand cools, Japan's trade deficit is expected to widen to its widest since the depths of the last recession in early 2009. Nevertheless, continued strong demand for the perceived safety of Japanese government assets provides support for the yen.
The Commodity Currencies are marginally lower this morning against their peers as falling commodities and equities prompts investors to exit higher-yielding, but riskier positions. Despite increased tensions with Iran, the price of oil slipped, but held above $100/bbl. Gold is slightly higher at $1641/oz, copper is flat at $351/lb and consumables are generally lower. The CAD dropped by nearly half of a percent against its North American counterpart as the price of oil, Canada's main export, pulled back towards the $100/bbl mark. The AUD and NZD both declined on the renewed concerns emanating from the Eurozone as investors seek safer investments.
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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.