The U.S. dollar rallied across the board on widespread risk aversion, carrying its bullish momentum from the previous two weeks. The MSCI Asia Pacific Index of shares slumped 2.2% today, the biggest slide since mid-March, as a Chinese manufacturing gauge fell to a 10-month low. The preliminary purchasing managers’ index for China dropped to 51.1 in May from a final reading of 51.8 in April. The Australian dollar, often traded as a proxy for China, fell over 1.0% and other commodity-based currencies came under pressure as the price of oil fell 2.5%. Overall, the U.S. dollar index climbed to its highest level since April 1 as falling equities and poor global economic data boosted demand for the American currency as a haven. There is no economic data slated for release this morning, so expect the U.S. dollar to continue its advance as American equity futures foreshadow a lower open. Tomorrow sees the release of new home sales followed by durable goods orders on Wednesday. Gross domestic product and weekly jobless claims are set for Thursday morning, followed by personal income, consumer sentiment and pending home sales on Friday morning.
The Euro slumped to the lowest level versus the U.S. dollar since mid-March and to a record low against the Swiss franc amid deepening concern Europe’s sovereign-debt crisis will worsen, reducing the appeal of holding the region’s assets. Late Friday, S&P cut Italy’s credit-rating outlook to negative from stable, citing slow economic growth and “diminished” prospects for a reduction of government debt. Fitch ratings also lowered Greece’s long-term debt ranking to B+, four notches below investment grade. At the same time, Spain’s Socialist party suffered its worst electoral defeat in more than 30 years. Spanish voters punished Prime Minister Jose Luis Rodriguez Zapatero’s party for soaring unemployment and spending cuts that aimed to shield the nation from Europe’s debt crisis. The Euro has stayed lower against its major trading partners as the Stoxx Europe 600 index declined 1.5%, diminishing demand for the higher-yielding asset.
The Japanese yen gained against all of its trading partners, except the U.S. dollar, as the two currencies gained on widespread risk aversion. Nevertheless, the Japanese currency could become under increased pressure in the coming months after a report last week confirmed that the Japan reentered a recession in the first quarter of 2011. GDP contracted an annualized 3.7% as the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending.
The British pound slumped against the dollar as falling stock markets boosted demand for safer assets. However, Britain’s currency reached its strongest level against the Euro in almost two months after Bank of England Chief Economist Spencer Dale said policy makers should increase interest rates even if the U.K. recovery remains uncertain. Bank of England policy makers will raise borrowing costs once this year, with the key rate ending 2011 at 0.75% according to the median estimate of economists surveyed by Bloomberg.
