Dollar Rebounds as Stocks, Commodities Pare Gains

The U.S. dollar took a breather overnight after investors sold the greenback against most of its major rivals late last week. Generally positive economic data and optimism that Greece will avoid a messy debt default undermined much of the greenback’s safe-haven appeal. Additionally, investors are looking at week’s second long-term capital tender by the ECB as a positive for the euro and risk assets in general. Over the weekend, G20 finance ministers met in Mexico City and agreed that Europe must commit more resources to fighting the financial crisis if it hopes to see more aid given to the IMF. The G20’s statement puts more pressure on Germany to put up more funds to boost the region’s bailout fund, a deeply unpopular idea to Germans. On balance, the greenback appears likely to stick to the lower end of its ranges barring any major catalyst that would push it in either direction this week.

The euro backed off of a two and a half-month peak against the dollar as global stocks and commodities pared their recent gains. The G20 statement over the weekend added to the single currency’s slightly heavier tone as well, as it raised doubts about the extent of IMF commitment in fighting the bloc’s debt crisis. This week, investors will focus on a second ECB long-term liquidity tender to help capitalize the region’s banks and keep lending costs capped. The ECB’s first auction in December saw banks take up nearly 500 billion euros in cheap funding, which significantly improved the euro’s tone.

The yen bounced off of a seven-month trough against the dollar overnight as bargain hunters moved in after the currency slid for the better part of February. Technical resistance and profit taking kept the yen from adding to its recent losses overnight.

The dollar-bloc group of currencies from Australia, New Zealand and Canada all took their cue from heavier stocks and commodities overnight.

EUR: The euro slipped off of a two and a half-month high against the dollar overnight as global stocks and commodities sold off and the safe-haven dollar found some mild support. Over the weekend, finance ministers from the Group of 20 rich and developing nations said they must see more action from Europe if they are to commit more funds to the IMF. The statement undermined some of the recent optimism surrounding the euro as it raised doubts about the extent of IMF involvement in future bailouts. The IMF was a major part of previous bailouts in Europe and a lack of funding from donor nations would put more pressure on Germany to take a much larger financial roll. Specifically, G20 finance ministers want to see the euro zone’s bailout fund significantly increased, an idea that remains deeply unpopular in richer euro zone states. This week, investors will look to the ECB’s second long-term refinancing operation (LTRO) for direction. In December, the ECB lent nearly 500 billion to euro zone banks, which helped alleviate worries about a bank failure and put downward pressure on euro zone interest rates. Another massive LTRO tender by the ECB would likely keep markets flooded with liquidity and support the risk appetite that has kept the euro biased higher since late December.

JPY: After falling by nearly seven percent against the dollar this month, the Japanese yen rallied off of a seven-month low overnight. USD/JPY ran into hefty resistance that fueled some bargain hunting and profit taking following a generally one-way move all month. The Bank of Japan’s surprise policy easing earlier this month and the structural deterioration in Japan’s balance of payments have kept the yen biased sharply lower. While the market may take break in selling the yen over the very near-term, its longer-term outlook remains negative, especially if U.S. data continues to paint a picture of an improving recovery and U.S. bond yields continue to inch higher.  

AUD: The dollar-bloc currencies, which tend to be very sensitive to global economic growth expectations, came under pressure overnight as stocks and commodities came off the boil. The sharp rise in crude oil prices (U.S. oil rose to near $110/barrel, its highest since May 2011) could potentially add a significant headwind to the still fragile global economic recovery. While this group’s fundamentals remain strong, they are vulnerable to a meaningful decline in risk appetite.

GBP: The pound tracked the euro and equities lower overnight. This week a busy U.K. economic calendar will be the main focus for investors. In particular, services, factory and construction PMI data will be closely watched for clues on the outlook for BOE policy going forward. A recent uptick in U.K. data suggested a nascent improvement in the economy, an idea that would be confirmed by strong figures this week.  

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