Dollar Extends Gains, Euro Pounded

The US dollar is broadly higher.  Three events have taken place and they all point in the same direction:  1) The three-notch downgrade of Greece on Friday was following by shift in the Italian debt outlook to negative from stable, 2)  Spanish and German elections which weaken the current governments, 3) softer than expected euro zone and Chinese PMI reports,  These events are weighing on equities and commodities, underpinning core bonds, and lifting the beleaguered greenback, 

Press reports suggest that Greece is running low on cash and needs to the IMF/EU too approave its next tranche, its fifth of 12 bln euros by the middle of July.  Polls shows the Socialists have slipped to a tie with the opposition, for the first time since before the 2009 election as voters grow increasingly austerity weary.  One poll found nearly 4 in 5 oppose new measures.  The French finance minister, the favorite for IMF head, warned that Greece could default.  The markets were happy to take the bait.

Meanwhile with the horrible backlash from the ECB and the EU, Juncker has softened his "re-profiling"talk and said that it would be a last step in a very long process.  The unscheduled "senior" European meeting earlier this month and the conclusion that Greece will not be able to return to the capital markets in 2012 as had been previously anticipated, has been poorly handled by European officials and this has intensified the crisis.   

While DSK personal life is in shambles, many are praising his public life and what he did for the IMF.  He made it relevant, it is claimed, yet if it weren't for the debt crisis, would it have been?  He was at the helm at the time.  He rose to the occassion.  Prior to the European crisis, the IMF did not play a major role in the larger debt crisis among industrialized countries.  And recall that Trichet even objected to the IMF's involvement in the European debt crisis initially.  Moreover, the initial strategy pursued in Europe has evidently failed as not only will Greece need an extension, but so will Ireland. 

It is true that under DSK the IMF did distance itself from the Washington Consensus and this is important.  However, it is not clear how much of this was a result of the increasing role of the developing countries in the IMF and those voices perculating up. 

The flash PMIs for the euro zone were well below expectations.  The 54.8 manufacturing reading compares with 58.0 last and 57.4 concensus.  Germany's reading is the lowest since Nov 2010.  France is also 7-8 month low.  The serivce PMI was 55.4 down from 56.7 and expectatinos of 56.5.  HSBC PMI for China fell for the second conseuctive month and at 51.1 it is near a 10-month low. 

The euro broke down and slipped through $1.3970, the first break of $1.40 since mid-March.   This is where the 100-day moving average comes in.   I cite this note as support but as a mile marker.    The next level of chart support is $1.3900.  

The euro is the prime mover and it has lost ground to most of the other currencies.  It has fallen to new record lows against the Swiss franc.  The BOE's Dale was quoted saying how UK households needs to prepare for higher rates.  This did not mean immediately and the implied yields on short sterling have eased.  The euro has lost ground against the pound because of broader euro weakness not sterling strength.  It is for example flat against the Swiss franc and off against  the yen and Canadian dollars.