The U.S. dollar hit another new four-month high against a basket of its major trading partners overnight. The greenback’s gains continue to be fueled by mounting risks in Europe, worries about a slowdown in previously robust growth in Asia and the view that despite its seemingly mixed economic recovery, the U.S. will outpace its major rivals in growth. The dollar’s safe-haven status benefits it during periods when investors are increasingly worried about the global outlook. Indeed, further deterioration in Europe and signs that China’s economy continues to moderate would likely keep investors wary of risk and hungry for the relative safety of dollar assets.

The euro tumbled to a new four-month low, and found some nascent technical support around 2012’s low against the U.S. dollar. Overnight, rumors that depositors were pulling funds from Bankia, an institution that was recently nationalized by Spain’s government, played up worries about Greek political deadlock and the growing risk of its exit from the euro zone impacting other fragile peripheral nations. The rising cost of Spanish government debt and the fragile state of its banking sector make the fourth largest economy in the euro zone very vulnerable. A breach of the euro’s 2012 low would likely pave the way for continued and sustained losses for the single currency.

Sterling fell sharply lower again overnight, hitting its lowest level against the U.S. dollar in one month. The pound’s decline was partially fueled by the mounting aversion to risk driven by the fluid situation in Europe. The pound was also put on the defensive after yesterday’s BOE Quarterly Inflation Report downgraded the outlook for growth and lowered the bank’s forecast for inflation, essentially giving policymakers more room to ease lending conditions further in the months ahead.   

EUR: The euro tested its 2012 low against the dollar overnight, but found some mild technical support around that level. The single currency has shed nearly five percent of its value this month as Greece’s political deadlock has made that nation’s bankruptcy and possible exit from the euro zone more likely, especially as voters look set to hit the ballots again in mid-June. With the far left SYRIZA leading in polls, it appears increasingly likely that any new government in Athens will have a decidedly anti-bailout, anti-austerity tinge to it. Investors now give Greece a 50/50 chance of remaining in the euro zone. The real concern however, is (and always has been) Spain. Rising government borrowing costs make it increasingly difficult for Madrid to meet its financing needs without external assistance. The massive liability that Spain’s tattered banking system represents for the government’s finances remains at the heart of the issue for Europe’s number four economy. Rumors that depositors were pulling funds from Bankia pushed the euro sharply lower overnight and highlighted the level of concern surrounding Spain. Given the euro’s sharp declines recently and the extent of short interest in the single currency, there is a significant risk of profit taking triggering a short-term counter-trend rally in the euro. Medium-term however, the euro’s outlook remains very negative.      

GBP: The pound hit a new one-month low against the dollar overnight, weighed down by the general pullback in investor risk appetite and the markedly dovish tone of the BOE’s Quarterly Inflation Report yesterday. While the pound has benefited from some capital flows out of continental Europe, the U.K. economy remains vulnerable to a sustained downturn in the 17-member bloc, Britain’s largest trade partner. The dovish tone to the BOE’s report yesterday suggested that policymakers have more room to ease lending conditions through additional asset purchases if the economic backdrop worsens. Consequently, the pound remains vulnerable.  

CAD: The Canadian dollar fell to a four-month low against the greenback overnight, in-line with the decidedly negative tone for commodity and dollar-bloc currencies. The loonie’s downside however has been far more limited than the Aussie and New Zealand dollars of late.  A strong bout of domestic economic data, its economy’s close proximity to the U.S. and the fact that it stands to benefit from a broader “North American” economic recovery have all underpinned the CAD relative to other major commodity currencies.   

USD: Weekly jobless claims were unchanged from a revised 370K last week, slightly above the 365K forecast. The four-week moving average, which smoothes out weekly volatility in initial claims, fell to 375K. On balance, the claims data continues to point to a very gradual, albeit patchy recovery in labor market conditions. The dollar inched lower on the news.