Monday during early deals, the US dollar climbed to new multi-day highs against the European majors as concerns about the global economy prompted investors to seek the safety of the world's most liquid currency.
Stocks across the Asia-Pacific and Europe fell today on speculation that persistently sluggish economic growth will curb demand. The dollar and the yen often strengthen in times of economic uncertainty as investors opt for low yielding currencies.
Automobile stocks declined after the U.S. government stated that bankruptcy might be the best solution for troubled automakers in the country, including General Motors, whose CEO Wagoner has been forced to quit the job. Resource stocks fell after the price of commodities declined on concerns that the U.S. plan for reviving the financial sector and unclog the credit markets might get delayed.
The demand for dollar's role as the world's dominant currency is under intense scrutiny as the China raised voice last week demanding a new global currency as an alternative to the dollar in international trade and finance.
Last Tuesday, China's central bank governor Zhou Xiaochuan called for a new reserve currency run by the IMF and said that the recent crisis revealed the dangers of relying on one currency. US Treasury Secretary Timothy Geithner responded to this saying that he was quite open to China's idea, triggering a plunge in the dollar.
A day after china's central bank governor comment, Geithner defended that the dollar was likely to remain the world's reserve currency for a long time, helping the currency to recover.
The dollar strengthened in early dealing versus the euro and climbed to a near 2-week high of 1.3164 by about 5:55 am ET Monday. If the dollar rises further, 1.298 is seen as the next likely target level. The euro-dollar pair closed Friday's deals at 1.3295.
The Spain's first bank bailout since the start of the financial crisis triggered euro's losses. The Spanish central bank took over the management of a troubled regional savings bank, the first such rescue move in 16 years.
The Bank of Spain replaced managers of the Caja Castilla La Mancha and took over its administration. The government also provided a guarantee of up to EUR 9 billion or US$12 billion of the liabilities.
Euros losses compounded further as the euro-zone economic sentiment indicator hit a new all-time low this month showing that the euro-zone economy has continue to decline in the first quarter of this year.
Commenting on the economic sentiment indicator, economist Christoph Weil at commerzbank said that the Since there is close correlation between the index and the year-on year rate of change in real GDP, today's result suggests that the eurozone economy will have contracted by roughly 2% quarter on quarter in the first three months of the year. He further said that the fact that the Euro zone economy has continued to contract at the start of the year will force the ECB to cut its key interest rate by 50 basis points on Thursday to 1% and to consider additional unconventional steps.
The euro weakened ahead of the rate review by the ECB where the bank is expected slash its interest rate by 50 bps from a record low level of 1.50% later this week. Markets also expect that the ECB may adopt unconventional measures such as printing money as the rates have already attained zero. Both the Fed and the Bank of England started so-called quantitative easing in order to boost their ailing economy.
At 4:30 pm ET today, the ECB president Jean Claude Trichet is scheduled to speak before the Committee on Economic and Monetary Affairs. The markets will be closely watching that to take further clues.
Euro suffered a blow last week as the German finance minister Peer Steinbrueck said the euro was at risk if the EU's Stability and Growth Pact isn't taken seriously. He complained that Germany's massive interest in EU's stability and Growth pact is not taken seriously by some. If it is not taken seriously, I am telling you, the euro will have trouble one day in terms of its own credibility and stability He said.
The dollar rallied to a 12-day high of 1.4114 against the pound during Monday's early trading, compared to 1.4323 hit late Friday in New York. On the upside, the next likely target for the US dollar is seen around the 1.384 level. With the advance, the dollar continued its move away from a 6-week low of 1.478 hit on March 24.
Against the currency of Switzerland, the US dollar spiked up during Monday's early trading. The dollar-franc pair edged up to a 12-day high of 1.1517 by about 5:25 am ET, compared to 1.1448 hit late Friday in New York.
At the same time, the dollar weakened versus the yen due to across the board rallying of the latter on the back of weak equities. The demand for the yen increased as the stock markets across the Asia-pacific fell sharply today morning taking cues from the Wall Street. Investors did not munch over the bleak economic report, which showed that Japan's industrial output plummeted in February.
Industrial output in Japan plummeted by 9.4 percent in February compared to the previous month, the Ministry of Economy, Trade and Industry said today, falling for the fifth straight month and marking the third-largest fall on record. That was slightly worse than forecasts that called for a decline of 9.0 percent following the 10.2 percent decline in January.
As a result, the dollar plunged to a 1-week low of 95.97 against the yen. If the dollar moves down further, it may test support around the 95.4 level.
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