The U.S. Dollar traded somewhat lower on Friday as demand for high-risk assets increased on optimism over the European debt crisis. Risk appetite was soon dampened by a statement from the ECB President, Mario Draghi, signaling the ECB would not step up bond purchasing in order to stem the debt crisis. The U.S. currency continued to rally after the release of economic data showing that core CPI rose to 2.2 percent, thereby confirming that the U.S. economy is on the path to recovery. This occurred despite a less than stellar drop in annualized headline inflation to 3.4 percent. Investors believe that recent data releases have reduced the need for further quantitative easing by the Federal Reserve. The Canadian Dollar dipped on Friday as investors speculated that the Euro region would continue to struggle with the debt crisis.
The Euro traded very close to an 11-month low against the U.S. Dollar in anticipation of this week’s French and Spanish bond auctions, and amid worries the second and fourth largest economies in the region will soon be downgraded. The Euro was also weighed down as Moody’s Ratings Agency downgraded Belgium to AA3, citing the demise of Dexia and the hike in borrowing costs as the main reasons. The 17-nation currency also dipped against the Yen after Fitch Ratings reduced the outlook for France and stated that it may cut Spain’s rating as well. The Euro managed to recover some of its losses versus the greenback as borrowing dipped somewhat after Italy’s Parliament passed proposed austerity measures. In addition, the European Central Bank announced it would offer three-year loans to the region’s banks at extremely low rates. The funds are to be utilized for purchasing high-yield bonds in order to increase demand and lower borrowing costs. The Euro benefitted further from risk appetite which developed from better than expected metrics out of the U.S. The Sterling steadied after reports indicated a big drop in Spanish borrowing costs. The British Pound dipped against the U.S. monetary unit for the first time in three days in anticipation of this week’s U.S. housing and consumer spending reports.
The Yen slumped early on Friday as risk appetite took over market sentiment on some optimism over the Euro-zone’s chance of recovery. The Yen was also weighed on by risk appetite after news revealed that the Fukushima Dai-Chi plant crisis has been stabilized after it suffered serious damages in the tsunami. The Japanese currency gained later in the day on domestic risk aversion still dominating the market after last week’s release of the Tankan Survey.
Lastly, the Australian Dollar dropped in the heels of today’s release of the Reserve Bank’s December Minutes. The New Zealand Dollar also snapped gains on fears the Euro region’s policy makers won’t come up with a solution to the debt crisis as they gather to discuss funding through the IMF. The Kiwi fell further on reports indicating that Consumer Confidence dipped in the fourth quarter, thereby signaling that spending is likely to decline and that the central bank will probably increase interest rates.
EUR/USD- Euro Drops Before Debt Sales
The Euro was only 0.7 percent away from trading at the lowest price in 11 months versus the U.S. Dollar as investors anticipate this week’s French and Spanish bond auctions. The markets have grown increasingly worried as France may lose its AAA rating as analysts predict this may hurt the 17-nation currency. Meanwhile, France is expected to sell 7 billion Euros of bills today. This week’s focus will be on German Producer Prices which may affect the ECB’s outlook for future monetary policy.
GBP/USD- Positive Economic Data Boosts Dollar
The U.S. currency rose against the Sterling after a release of positive economic data fueled risk appetite. The British currency dipped in anticipation of this week’s U.S. reports, which are expected to be just as positive and provide further evidence for the Federal Reserve to keep from instituting further stimulus. There were no economic releases out of the U.K. on Friday so the currency reacted to market trends. Economists and investors are still worried about the U.K.’s economy, and foresee the possibility of the country going into a double-dip recession. The Bank of England will publish its interest rate decision this week. The currency is forecast to advance versus the Euro as the crisis in the region boosts demand for the safety of Gilts.
USD/JPY- Fukushima Plant Finally Stabilized
The Yen traded lower against the U.S. Dollar on Friday s risk appetite rose on news that the damaged Fukushima Dai-ichi plant was finally gone into “shut down” status and it’s therefore stable again. The Yen continued to dip as risk appetite increased on reports that the Spanish and Italian borrowing costs had dropped somewhat. But the Yen was still affected by the lackluster Tankan Survey which revealed a drop in Manufacturing in the fourth quarter.
NZD/USD- CCI Drops In Fourth Quarter
The New Zealand Dollar fell versus the greenback as consumer confidence dwindled down in the fourth quarter on worries that the European sovereign debt crisis may lead to tighter credit and a slowdown of the world economies. An Index showed that household sentiment dipped to 101.3 from 112, the lowest since the earthquake which devastated Christchurch. Other data showed that business confidence advanced in November for the first time in four months.
Today’s economic calendar shows that Canada will report on Wholesale Sales, the E.U. will issue the Current Account, and the ECB President is set to deliver a speech. The U.K. will report on Nationwide Consumer Confidence while Australia releases the Monetary Policy Meeting Minutes.