The US$ is stronger this morning against the EUR while remaining range-bound against the JPY and GBP. While economic data continues to disappoint in the U.S., the dollar has benefited in a recent moderate wave of risk aversion with global stock indexes in a weeklong skid. The dollar has gained against the euro this morning following a .5% cut in interest rates from the ECB, which was widely anticipated. The eroding yield advantage of the EUR, combined with extremely negative economic data out of the Euro Zone has led investors to flee the common currency. This morning Investors took note of PPI data, registering –1.9% in line with expectations, Weekly Jobless Claims, which rose to 524K up 50+K from last week, and Empire Manufacturing, which contracted to –22.2. With continued weakness in the labor market and U.S. manufacturing, the dollars gains may be capped against most major currencies. However, with the overall direction of trade tracking the comparative health of the G7 economies, the US$ has benefited as the U.S. economy is expected to recover sooner than many of its industrialized counterparts.
The EUR is lower this morning following a cut in interest rates by the ECB. The Bank lowered the target lending rate to 2%, the lowest level on record. However, the ECB is seen as being late the party, having resisted lowering interest rates as quickly or as drastically as its U.S. and U.K. counterparts. At 2%, Euro Zone interest rates remain the highest amongst the G7 nations, which may ultimately cap the currencies downside risk. Following the Bank’s decision, ECB President Trichet said that he sees inflation picking up in the second half of 2009, and thus may be signaling an end to the Bank’s recent easing cycle. He went on to rule out any policy action in February, stating the time between now and then too short. However, the Euro Zone economy remains in a dire state with S&P having cut Greece’s sovereign debt rating, thus increasing the cost for the Greek government to borrow money. The rating agency has also threatened to lower its rating of Portugal, Spain and Ireland as the budget deficits in those countries balloon. In the short term, expect the EUR to push lower as the overall health of the Euro Zone weighs on the common currency.
The JPY is relatively unchanged against the dollar this morning, while rising against the EUR. The yen has benefited as of late in a reemergence of risk aversion as global stock indices slide. The yen has also been well supported this morning following a .5% cut in Euro Zone interest rates. While the ECB’s target rate is already relatively low, it still stands as the G7 highest rate. A cut in that rate has prompted investors to sell EUR positions for the safety of the yen. In the short term, expect the yen to remain supported as global stocks decline.
The GBP consolidated within its recent ranges against the dollar while gaining against the EUR. The pound remained flat against the dollar as economic data registered largely in line with expectations. Sterling did however gain on the EUR as the ECB cut interest rates .5% this morning, diminishing the common currencies yield advantage over the U.K. In the near term, expect the pound to remain range-bound as investors gauge the overall health of the British economy with that of its G7 counterparts.
By Matt Esteve
