Dollar Consolidates Recent Losses

The US dollar is consolidating its recent losses and is enjoying a somewhat firmer tone today. Although the initial advance in the euro was helped by a favorable news stream, macro-developments do not appear to be driving the foreign exchange market presently. That said, the news stream out of the euro zone has soured since the start of the week, but the euro, even with today’s pullback from testing the June high, the euro remains fairly resilient. Position adjustments among momentum traders and by medium term investors as the half year end approaches may be having greater sway.

Yesterday’s advance in the US S&P 500 through its 200-day moving average to its best level since May 19th helped lift Asian equities today. The MSCI Asia-Pacific Index rose about 1%, extending its advancing streak to 5 sessions, in which time it has rinse about 5.7%. The resource sector was the strongest sector, helped by the higher commodity prices. Foreign buying of Korean stocks for the fourth consecutive session is noteworthy and appears to have helped the Korean won rise to 2-week highs. The global equity rally is more muted in Europe, with most bourses up less than 0.25% and several markets, including Italy and Spain, nursing losses.

Strains in the periphery are evident. News that the ECB will require a 5% haircut on the use of Greek bonds for collateral, falling this week’s downgrade has weighed on sentiment and seen the Greek-bund spread widen out, but Spain is in the cross hairs, with its spread over Germany the widest since the start of EMU. Continuing press reports of some kind of aid package for Spain have been met with repeated denials, but market anxiety is running high.

At the same time, the market is absorbing supply. Germany’s 10-year bunds auction saw a 1.6 bid-cover, while Portugal successfully sold 718 mln euros of 9-month bills, with a 1.8 bid-cover. As noted earlier in other peripheral auctions in recent days, the successful reception has come at a cost of sharply higher yields. Fro example, the yield on Portugal’s bills (2.689%) was 2 ½ times higher than the yield on the previous auction for the same bills.