The U.S. dollar rallied overnight as European equities and American stock futures both declined, boosting demand for the greenback. The U.S. dollar rose the most against the South African rand amid signs that the global recovery is faltering. The Canadian dollar fell for the second straight day as the price of crude oil retreated. This morning’s economic docket showed that mortgage applications in the U.S. fell last week as borrowing costs climbed from a record low. The Mortgage Bankers Association’s index decreased 5.0% after jumping 23.0% in the prior week. Later, the house price index is expected to hold flat from the month prior when it declined 0.2%. In addition, pending home sales are expected to have shrunk 0.1% in December after climbing 7.3% in November. This afternoon, the Federal Reserve’s FOMC will announce their interest rate decision. Its is widely expected that the Fed will leave interest rates unchanged at 0.25%, however, commentary following the release could affect the direction of the U.S. dollar.
The Euro weakened versus the dollar overnight, a day after the finance ministers were once again unable to solidify plans to settle Greek debt. The common currency came under pressure after the European Central Bank was said to oppose restructuring its Greek bonds. The ECB faces pressure to join private-sector investors in taking losses, but the central bank sees this as potentially damaging to the confidence in the institution. A successful auction of German 30-year bonds garnered more than the targeted 3 billion euros today, while the German IFO business confidence rose for a third consecutive month to108.3, from 107.2 the previous month. Focus remains squarely on January 30th , as the EU summit’s ability to come away with something resembling a solution to the deepening debt crisis will be tested.
The sterling fell overnight as GDP fell 0.2% compared to the expected 0.1%, signaling a real possibility of a second recession in three years. In addition, the pound remains under pressure on speculation that the Bank of England will increase its asset-buying program. Earlier this month, the BoE unanimously voted to keep the quantitative easing program unchanged at 275B pounds, although monetary policy makers are not ruling out an increase in the coming months if inflation allows. Indeed, BoE Governor Mervyn King said yesterday that policy makers an increase stimulus again if needed to guard against a “renewed severe downturn.”
The Japanese yen fell to near its weakest level in two months against the U.S. dollar after Japan reported its first annual trade deficit in 31 years. Japan’s Ministry of Finance reported that the nation’s exports dropped 8.0% in December from a year earlier. The figures show the impact of slower global growth and March’s earthquake on the economy. The declines in shipments from Japan resulted in a 2011 trade deficit of 2.49 trillion yen.
