The U.S. dollar rallied against all of its major counterparts, save the Japanese yen, as political instability in Europe pulled global equities sharply lower and boosted demand for the relative safety of the U.S. dollar. The greenback tends to strengthen during periods of financial or political stress due to its status as the world’s reserve currency. The greenback also rose against the commodity-based currencies as the price of crude oil and the prices of other commodities such as copper fell. The Australian dollar remains under pressure before data that is expected to show the unemployment rate rose to 5.3% in October from 5.2%. Poor industrial production data released in China added to the overall risk-averse market sentiment, further adding support for the U.S. dollar. Industrial output rose 13.2% in October, less than the 13.4% median estimate. Meanwhile, the U.S. economic docket showed that mortgage applications in the U.S. increased last week by the most since August. The Mortgage Bankers Association’s index rose 10.3%, besting estimates for a 0.2% gain. The data has not moved the direction of the dollar in early trading. Expect the U.S. dollar to remain in favorable ranges throughout today’s trading session as U.S. equity futures show American shares will open as much as 2.0% lower.
The Euro dropped over 1.0% against the U.S. dollar amid concern Italy will join Greece in struggling to form a new regime strong enough to implement austerity measures following the resignation of Prime Minister Silvio Berlusconi. Berlusconi said he will resign once parliament passes an austerity bill that has yet to be written. As a result, the spread on Italian 10 year bonds rose to a euro-era record over 7.0%. Meanwhile, clearinghouse LCH Clearnet announced today that it is increasing its margin requirements for clients wishing to deal in Italian bonds, adding to the common currency’s weakness. Greek Prime Minister George Papandreou’s talks on forming an interim government dragged into a third day as near-agreement with the biggest opposition party stalled on European Union demands for written commitments. Antonis Samaras, leader of Greece’s opposition New Democracy party, reacted angrily to a demand from EU officials that he sign up to budget measures required to receive a second financing package of 130 billion euros decided on October 26th. A letter will need to be signed by Papandreou, Samaras, the new prime minister and finance ministers as well as the head of the Greek central banks, according to a Greek government official.
The Japanese yen advanced against most of its major peers on widespread global risk aversion and as concern waned that the Bank of Japan will act again to weaken the yen. The yen pushed modestly higher versus the U.S. dollar and reached its strongest level since October 31, when the Ministry of Finance made what is estimated to be its biggest currency market intervention to curb gains.
The British pound fell nearly 1.0% against the U.S. dollar as investors dumped stocks from Europe to Asia. The pound was under added pressure after the British Retail Consortium said shop-price inflation eased to the slowest this year in October amid flagging consumer demand. However, the sterling gained versus the Euro as the currency has become the currency of choice for investors seeking European exposure without purchasing the common currency.
