The USD strengthened broadly overnight, on the back of a turn to risk aversion in global markets. Equities were weaker for a second day in Asia and Europe, helping the fortunes of the USD which has been benefited by stronger yields and an esclating situation in Egypt.
Egypt Situation Creates Uncertainty: It was a surreal moment yesterday when crowds in Egypt's Tahrir Square gathered as they believed embattled President Hosni Mubarak would step down. Instead the President said he would stay on, though transferring most of his authority to the Vice President. Protesters were outraged, and called for more demonstrations on Friday. Markets are on edge about the situation and concerned about the possibility of the military responding with force against the anti-government protesters, creating risk aversion and less demand for higher yielding assets and currencies.
US Jobs Data Boosts US Yields: The USD is feeding on the risk aversion, but is also benefiting from stronger yields on its debt as a result of the stronger US jobless claims report yesterday. We know a stronger employment situation would go a long way in satisfying Fed policy makers to begin to talk exit strategy. According to Dow Jones Newswires, Analysts also say that yield differentials between US, Japanese and European debt are beginning to favor the dollar, at least in the short-term.
EUR Pressures by ECB Succession, Sovereign Debt: In today's risk-averse environment the Euro is being sold off, as investors continue to see the euro-zone facing an unresolved sovereign debt crisis, and there has been a recent pick up in the premium demanded for buying euro-zone periphery debt.
Also pressuring the Euro is the announcement that Axel Weber was not going to seek the ECB Presidency, a move that put into question who will lead the central bank once Trichet's term is up. Weber was known as a hawk because he also runs the German central bank, and they have always valued price stability.