Tuesday March 23, 2010

The U.S. dollar is once again in the driver's seat as speculation grows that European Union ministers will fail to devise an agreement over a financial aid package on behalf of Greece at this week's European summit. Investors are growing ever more skeptical about the ability of the euro to retain its value set against the backdrop of an apparently growing number of decision-makers turning their backs against the domestic investment climate across the Eurozone until the picture is resolved.


Euro - The euro is bang on the $1.3500 level as we pen today's market brief and is lower by a half cent on the day. Greek Prime Minister Papandreou's clear threat to go cap in hand to the IMF for funding should finance ministers at this week's summit fail him still stands. However, that firework display finds itself slipping down the agenda with ECB head Trichet sounding off about the cost of any loan financing to Greece. It sounds like Monsieur Trichet is saying that ultra-low European bond rates have been earned through decades of conservative monetary policy and prudent fiscal policy. Such an indentured reward has to first be earned and cannot be bought into simply by joining the European Union itself. It would appear that tinkering with the rules or by providing obfuscated data sets any member nation back to square one.

German Chancellor Merkel has also been keen to escalate her own items higher up the agenda, which is also having a positive impact on the nation's exporters. That's a polite way of saying the euro remains rather weak once again. Ms. Merkel wants to ascend a discussion at this week's summit over potential sanctions against EU member-nations that meddle with mandated deficit limits. When the euro was first introduced there was a system of punishment against those states that breached the strict 3% of GDP deficit limits. So draconian were the measures that the punishment included a series of fines that were so onerous as to act in a perverse way of causing further deterioration in the deficit.

U.S. Dollar - The ascendancy of deficit discussion to the forefront of currency valuation has bypassed the dollar. With a sizeable deficit of its own and a legacy of being a refuge at times of stress on its side, the dollar continues to edge higher. Earlier this year the dollar was driven higher by growing expectations of a rise in yields from the perceived view that the Fed would soon start to drive short-term interest rates higher. That view has tailed off for now and investors are looking forward to a summer of static interest rates. The dollar remains higher on Tuesday morning against a basket of currencies.

British pound - Last month the pound rose smartly after the release of a raft of rather shocking inflation data, which might have led to a swifter increase in rates from the Bank of England. The January CPI data showed a 3.5% jump in consumer prices at an annual rate. And so today's report reflecting a decline to 3% for February data served to undermine those same expectations and saw the pound trading beneath $1.50 for some of the morning session. The pound also lost out to a relatively stronger euro by falling to 89.92 pence.

Canadian dollar -The Canadian dollar is shaking off dollar strength routed in the problems of the Eurozone. Monday saw the loonie decline only to burst back to the upside on Tuesday where it buys 98.37 U.S. cents.

Japanese yen - The yen attempted a traditional safe-haven style rally against the dollar in light of the messy Eurozone situation but has struggled to convincingly breach ¥90.00 to start this week. Monday's excursion to ¥89.84 was rejected with ease and the dollar has now completely reversed that loss to stand at ¥90.40.

Aussie dollar -The Aussie dollar ran into stiff multi-week resistance at 92.30 last week when the environment best suited further gains. Since then and throughout a little risk aversion, investors cooled their appetite for local dollars. However, the Aussie looks a heck of a lot better Tuesday than it did Monday after it slumped to an intraday low at 90.84 U.S. cents. In mid-morning trade today the Aussie burst to 91.96 cents as equity prices keep moving in the right direction.

Andrew Wilkinson

Senior Market Analyst