A renewal in risk aversion as a result of continued woes over the Greek debt crisis caused the U.S. Dollar to increase in value. The release of the Beige Book reports showed that the U.S. economy grew at a stable pace though it slowed-down in several of the regions. The Federal Reserve Chairman, Ben Bernanke, issued a statement indicating that the growth was “frustratingly slow” and supported continuation of fiscal stimulus. He went on to say that the economy is performing “below its potential.” Tuesday’s comments by another Federal Reserve official suggested that interest rates will remain unchanged and if stimulus comes to an end, the lack of liquidity will hamper bank lending and would boost the price of the greenback. Other metrics showed a decline in Oil Inventories which led to higher energy costs and possibly acted as a catalyst in the short-term devaluation of the Dollar. Also, mortgage applications were lower than expected. The negative outlook for the U.S. economy also prompted a drop in the value of the Canadian Dollar. The Loonie had recouped some of its losses earlier in the day when crude oil rose. On the economic front, Canadian Housing Starts increased from 178,700 to 183,600 in May.
Meanwhile, the Greek debt crisis continued to cause ripples and uncertainty in the currency market. There seems to be a disagreement on where to obtain the funds for the second bailout package. The Euro fell against the greenback following remarks by Germany’s Finance Minister, Wolfgang Schaeuble, indicating that bond holders should be the ones to fund the bulk of the aid package. But ECB President, Jean-Claude Trichet, and other ECB officials oppose this strategy and prefer to examine other options. The Euro maintained a downward trend as the IMF emphasized that the 26 billion Euro loan to Portugal is not devoid of risk, thus raising worries of another possible default. Yesterday’s reports showed that the region’s GDP did not change. But the Pound Sterling weakened against the U.S. Dollar and the Euro as Moody’s Investors Services stated that the U.K. would face a reduction of its credit rating unless the pace of the country’s recovery picks up. The latest BRC Retail Sales figures revealed a dip of -2.1 percent as consumers are limiting their spending to necessities. Analysts believe the country faces another recession given reduction in growth.
The Japanese Yen rose on higher demand for refuge currencies, increasing concern over the sluggish U.S. economy and the lack of consensus for handling the Greek debt situation.
Out of the South Pacific, the Australian Dollar declined against the greenback following the release of the Federal Reserve’s Beige Book reports. However, the New Zealand Dollar advanced as interest rates remained unchanged and commodity prices remained high.
EUR/USD- Disagreement Reigned Over Bail-Out
The Euro was weighed by further disagreement over how to obtain the funds to produce a second bail-out package for Greece. Furthermore, the 17-nation currency dropped further as new concerns arose over the possibility of Portugal defaulting as well. Metrics pointed to an unchanged GDP, thus reflecting slight growth.
GBP/USD- Moody’s Warned The U.K.
The Pound sustained losses versus the U.S. currency after Moody’s Investors Services warned the U.K. that its AAA rating may be in jeopardy given the weakness of the economy. The rate was not changed so far, and the Sterling recouped some of its losses later in the day. However, the increase in inflation, the introduction of stringent austerity measures and the higher VAT tax have affected the British economy and its currency. The BoE lost its most bullish member and it’s likely that the remaining members will take a more accommodating posture. Analysts believe these factors will weigh on the Pound.
USD/JPY- Yen Rose On Higher Demand For Havens
The Japanese currency increased following higher risk aversion in the markets and the demand for safe havens. Meanwhile, Japan’s Finance Minister, Yoshihiko Noda is keeping an eye on the value of the Yen in the event that over-strengthening of the currency requires intervention, as he mentioned in yesterday’s speech. The Yen is trading at dangerous levels against the U.S. Dollar –close to the low prices at which the G7 intervened with an injection of funds. The Yen has risen against the greenback as anticipation of a hike in U.S. interest rates wanes. The Dollar has become the source for the carry trades and will remain as such for as long as interest rates remain low. On the economic front, the Trade Balance revealed expansion in deficit though it was offset by the Current Account data which returned confidence to the markets.
NZD/USD- Interest Rates Left Unchanged
The New Zealand Dollar strengthened against 16 of its counterparts as the Reserve Bank announced it would leave interest rates at 2.5 percent, but would raise them in the following two years. Furthermore, as commodity prices remain high, the country benefited from exports.
Today’s calendar is filled with extremely important events; investors await the release of the U.K. Trade Balance as well as the BoE’s Interest Rate Decision. The Euro-region will also announce its Interest Rate Decision while the U.S. reports its Trade Balance, Initial Jobless Claims and Wholesale Inventories. The ECB President, Jean-Claude Trichet, is scheduled to speak at a Press Conference. Lastly, Canada will issue the Trade Balance and New Housing Price Index while Japan will release Machine Tool Orders.