Dollar Surrenders Yesterday's Gains

The US dollar has given the gains scored in North America yesterday.  New highs for the move was recorded in the euro for the advance.   Sterling was first sold through yesterday's lows on soft BRC sales, but then recovered to trade through yesterday's high.  After nearing $1.6475 sterling pulled back half a cent.  Still, in bigger picture, I expect further dollar weakness. 

For the day, though, I think it is noteworthy that the euro failed to make new highs on the back of the very strong German factory goods orders data, which should blunt some of the negativity emanating from the soft PMI data.   Aprice factory goods orders rose 2.8% rather than the 2.0% the consensus expected.   Moreover, the March data were revised to show a 2.7% decline, not the 4.0% decline initially reported.   It warns too of upside risks to tomorrow industrial output figures. 

The euro's recovery in Asia have been linked by contacts and the media to Trichet's endorsement of plans to seek commitment from current Greek bond holders to roll over maturing issues.  Trichet's endorsement came after both S&P and Fitch warned that "distressed exchanges" would be a credit event. 

Meanwhile, the IMF indicated that Greece reform efforts lost momentum into the end of alst year, but did cite important progress including the decline in unit labor costs.  It indicated a willingness to consider a further rolling out of payment terms.  Meanwhile, support for the aid package is beginning to see oppostion, as in Slovakia. 

The two seeming innovation of this package are the emphasis on privatization and the role of the private sector.  Both are hardly new and both are particularly problematic in Greece's situation.  Privatization has been a traditional IMF program and a number of countries, including Spain and Portugal are engaged in such programs for example.  Portugal is also already trying to encourage private sector investors to roll-over their debt. 

Yet in Greece's case, while some window dressing, like the exercise of an option and some accounting/financing gimmicks to reduce some quick results, but the risk is that to the extent the assets are bought, it is domestics rather than foreign and is considerably less than hoped.  While the privatization agency is said to be independent, it is not cleare whether Greece has conceded a role for foreign participation. 

In addition, despite Trichet's endorsement, given the downgrades in Greece and high market rates, private sector participation in voluntary roll-overs may be more tricky than it may appear. This raises two issues.  First, who will participate.   Large holders include, the ECB, Greek institutions, like pension funds and private sector banks.  Foreign banks who anticipate a long-term relationship in Greece may be also be candidates.  Second, what possible inducements would be sufficient, without triggering a CDS event. 

The new Portuguese aid package is following a similar pattern as earlier ones.  Namely inability to stabilize the bond market.  Ten-year Portuguese bond yields are making new highs today.  Spain's Catalonia's warning that it exceed this year's budget target is worrisome, though not surprising, as I have wrote about before the recent local and regional elections.  Moody's was quick to note that it was "credit negative"  for Spain's sovereign and regional ratings. 

In Japan, the rating agencies are divided.  S&P said earlier today that Kan's departure would be seen as a positive development.  Yesterday, Moody's warned it was negative.  Movement continues to be seen in the direction of a national unity government where the DPJ and LDP form a coalition.  Perhaps, a move to such elsewhere--note the broad number of major countries that have elections next year--is a rational response to the hard decisions that have to be made, including the re-defining of the relationship of the individual to the state.