New Week, Same Dollar--Higher

The US dollar is broadly higher to start the last full week of the month. The pre-weekend short-covering of the euro has been reversed and with today’s more than 1.5% loss has retraced more than 50% of its gains scored in the second half of last week.

News that Spain rescued a savings bank over the weekend contributed the undermining of sentiment. Sterling traded up to almost $1.4530 before being setback in the European morning. Support was found ahead of $1.4400. Although the reports of GBP6.24 bln in spending cuts announced by the new government have attracted interest, but the June 22 emergency budget is seen as more significant. Meanwhile the dollar is trying to re-establish a foothold above the JPY90 level, but risk aversion may help capped the greenback in the JPY90.50-75 area. High yielding emerging market currencies are generally firmer today.

Global equities are mixed. The MSCI Asia-Pacific Index rose 0.5%, the first gain in more than a week. China’s markets were up the most, perhaps encouraged by waning fears of additional tightening measures during the European crisis. In the last two sessions, the Shanghai Composite is up 7.8%. Foreign investors continue to take profit on South Korean shares, amid heightened tensions on the peninsula, though the won stabilized at lower levels. Of note Thai stocks fell almost 2.9% as domestic political unrest reached new heights. European bourses have struggling to maintain early gains, with Germany, Spain and Italy turning lower by midday. Note that many bourses in Europe are closed for holidays today.

Japanese government bonds snapped a three-day advance today. The benchmark 10-year yield remains within a couple of basis points of their lowest levels since last December. In contrast, European bonds and US Treasuries are firmer, with yields around 2 bp lower. The US Treasury will sell $113 bln of coupons this week, which is about $5 bln less than raised by a similar coupon sale last month.