Dollar Bid, No Closure in Europe

The US dollar enjoys a firm tone against most of the major foreign currencies today. There are two main features in the foreign exchange market today. The first is investors still lack closure on the European crisis even after Greece formally acknowledged that it needs to draw on the European/IMF backstop facility. This has undermined the euro, which after failing to build on the pre-weekend gains has been sold in Europe, dropping 2 cents to $1.34 before finding support.

The second main feature is the resilience of sterling. Weekend polls seem to hold out the possibility of a Tory plurality. Sterling tested the cap near the highs of the month around $1.55 and subsequently was pushed lower. The euro is testing the year’s low against sterling just above £0.8600. The yen is largely sidelined as the dollar consolidates its recent gains that carried it back to the ¥94.00 area. Asia’s regional currencies generally advanced against the dollar, while central and eastern European currencies have been dragged lower by the euro.

Global equity markets are generally advancing today. Boosted by exporters, which were encouraged by the weaker yen and stronger global growth prospects, lifted the Nikkei by 2.3%, the regional leader. The Shanghai Composite lost about 0.5% to bring the month’s decline to 4.5%. Financials continue to under perform in the wake of tightening of lending conditions in parts of the real estate market. European bourses opened sharply higher, but anxiety over Greece increased, European markets saw early gains pared. Basic materials and industrials are the strongest sectors today.

The unresolved nature of Europe’s debt and deficit problems have weighed on the euro, but are most evident in the debt market today. Greek 10-year yields are up 73 bp at 9.38%. The markets also continue to disagree with the European officials’ assessment that there is no economic justification for contagion. Portugal’s 10-year yield is 19 bp higher. Irish 10-year yields are 8 bp high and Spain’s 5 bp higher. German bunds meanwhile draw a safe haven bid pushing its yields down by 3 bp. This means new widening of interest rate differentials.

Pressure is even more pronounced. Greece’s 2-year yield has risen 273 bp today, with Portugal and Ireland seeing their 2-year yields rise 69 bp and 62 bp respectively. Spain’s 2-year yield is up 24 bp. Europe’s woes are also giving US Treasuries a bid. Indeed the crisis in Europe may increase the likelihood that the US auction this week of some $129 bln worth of coupons and $49 bln of bills will be well received.