The US$ fell overnight as market concerns continue to mount about the likely fallout from subprime mortgage defaults and the contagion that could accompany these defaults. There could be a significant shakeout from these defaults causing further losses to investors as they liquidate the bonds backing these positions. Any liquidations would weigh heavily on the US$. Further weighing on the US$ is a deep concern that the US housing sector is entering a period of a prolonged slump. Should US home prices continue to remain under pressure, the Fed will be forced to keep rates steady for a prolonged period of time, if not cut them by year-end. This interest rate environment is weighing heavily on the US$. Increased geopolitical tensions, highlighted by a growing US military presence in the Persian Gulf, continued misdirection and chaos in Iraq and the recent surge in oil prices above $73 all continue to shift investors away from the greenback. It is also important to remember with oil prices at current levels there has been a surge in Petrodollar holdings by Middle Eastern nations and Russia. These increased dollar holdings have caused these countries to make significant shifts in their reserve diversifications, as they continue to mix their global holdings away from the greenback. The US released Trade Balance figures this morning revealing a deficit of $60.0 billion, in line with expectations. In addition, weekly jobless claims were released at a better than expected 308,000 vs. a forecasted reading of 315,000.
The euro continues to firm, supported by a strong economic outlook for the Eurozone coupled with the likelihood of higher rates later this year in the region. Further helping the euro higher were comments from Portuguese Finance Minister Teixeria who stated that he “does not believe that there is currently an exchange rate problem in Europe.” He also stated that he does not believe economic problems can be solved by “devaluing the euro.” These comemnst echoed those from ECB Board member Stark yesterday who stated that he believes euro strength reflects “the strong fundamentals” of the Eurozone economy. With these comments as a backdrop, the market is beginning to adopt the view that Eurozone officials will tolerate further euro strength and that current levels cause them no discomfort. This backdrop should help to continue to propel the euro to new highs.
The yen gained modestly overnight as Bank of Japan officials suggested that rates could soon be rising. These comments came following today’s policy decision meeting where rates were held steady at 0.5%. BOJ Governor Fukui stated that recent growth data won’t determine the outcome of next month’s rate policy meeting. He further stated that Japanese companies are beginning to become concerned about excessive declines in the yen. With it now appearing that Japanese rates could be rising at next month’s meeting and the continued unwinding of the “carry trade” as more systemic risk enters the market, look for the likelihood of further yen appreciation in the coming months.
The pound continues to remain firm; surging to fresh 26-year highs overnight as high UK interest rates coupled with vibrant economic growth attracts capital. Look for this trend to continue as the likelihood of further rate hikes from the Bank of England will continue to support sterling as the BOE aims to tackle mounting inflation pressures brought upon by robust economic growth.