Worries about more budget strife in Washington drive safety demand
Sterling retreats from 16-month highs on disappointing construction PMI
Commodity currencies relatively flat on US debt ceiling worry
USD- The US dollar strengthened to a three-week high against a basket of currencies as concerns over additional budget strife in Washington drove investors to seek the greenback as a safe haven. Although lawmakers reached a deal to avert the "fiscal cliff" of huge tax hikes and spending cuts, the agreement has set up potential confrontations over the next two months on spending cuts and an increase in the nation's debt ceiling. Adding to additional market concerns that the U.S. deficit issues remain unresolved, ratings agency Moody's Investors Service said the United States must do more to rescue its AAA debt rating from its current negative outlook. The US currency also received a boost after data showed U.S. private-sector employers added 215,000 more new jobs last month. Markets will now be closely monitoring Friday’s monthly nonfarm payrolls report.
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EUR-Then euro weakened against the US dollar and the Japanese yen as the market sought safe-haven currencies on concerns about the prospect of more U.S. budget negotiations in coming weeks. Adding pressure to the single currency, some analysts expect the euro zone economy to continue to struggle in coming months as tough austerity measures and high unemployment across parts of the currency bloc dampen economic activity. That could increase pressure on the European Central Bank to cut its deposit rate into negative territory when it meets next Thursday, a move that would weigh on the euro.
GBP- Sterling retreated further from a recent 16-month high against the US dollar after UK construction data disappointed, and as the euphoria generated from the U.S. budget deal faded with investors bracing for political battles ahead over spending cuts. The UK construction purchasing managers index (PMI) came in below expectations, falling to its weakest level in six months. Although that took some of the shine off Wednesday's better-than-expected manufacturing PMI, most investors are eagerly awaiting the more important services sector PMI, due on Friday. The Bank of England also meets next Thursday, where it is widely expected to keep rates on hold, and its asset purchase program unchanged until at least March this year.
JPY- The Japanese yen rose against all 16 of its most-traded currencies amid concern the U.S Treasury will exhaust what it called “extraordinary” measures to keep funding the government by February or March after the nation hit its $16.4 trillion debt ceiling Dec. 31. The yen, still trading at the 86 handle, continues to look fragile on expectations the Bank of Japan will further ease monetary policy. The Japanese currency will likely remain vulnerable until the BoJ’s policy meeting at the end of January.
Commodity Currencies- The Australian dollar initially retreated from near a two-week high against the US dollar as concern U.S. lawmakers will struggle to agree on raising the nation’s debt ceiling overshadowed the bill they passed to avert the so-called fiscal cliff. The Aussie also slid versus most of its 16 major counterparts. The New Zealand dollar reversed a gain from yesterday as U.S. stock futures fell. However, both the Australian and New Zealand dollars managed to reverse earlier losses versus the greenback after a private report showed U.S. companies added more workers than projected in December, and as strong iron ore and dairy prices underpinned growth-linked currencies. The Canadian dollar traded at almost a two-week high against the US dollar, boosted by optimism the nation’s largest trading partner may be picking up speed with a positive private employment report.
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