The single currency slid across the board after the Wall Street Journal story rekindled worries about Europe’s banks. Data showing a steep slide in German manufacturing orders as a result of soft foreign demand added to the euro’s heavy tone and highlighted the dependence of the bloc’s recovery on still shaky external demand. The euro should remain vulnerable amid a backdrop of global growth concerns and diminished risk appetite.

The Aussie gave up some if its recent gains after Labor Prime Minister Julia Gillard formed a coalition government with independent and Green Party members. The Labor/Green coalition greatly increases the risk of the government going ahead with a controversial 30% mining tax and new initiatives to limit carbon emissions, both seen as undermining Australia’s economic strength. 

The Bank of Japan expectedly left monetary policy unchanged overnight. Governor Shirakawa said that monetary authorities could not control exchange rates, signaling a lower risk or market intervention by the BOJ.

USD: The greenback once again benefited from the broad pullback in investors’ appetite for riskier assets. The Wall Street Journal Story highlighting the flaws in Europe’s bank stress tests reignited concerns about the health of the continent’s banks and prompted investors to pare exposure to stocks, commodities and higher yielding currencies. The low yielding, safe haven dollar was boosted by the broad flight to safety, despite the mounting signs that America’s recovery may be faltering. The dollar should continue to outperform most of its rivals amid a backdrop of growing concerns about the global economic recovery, increasing worries about European debt and banking issues and a general decline in investor sentiment. An increasing risk of a double dip recession would dull some of the greenback’s safe-haven allure, but is not likely to trigger a wholesale abandonment of dollar assets. Under a scenario of declining risk appetite throughout global markets, the yen and Swiss franc should also outperform.

EUR: A Wall Street Journal story reported the flawed design of Europe’s bank stress tests allowed some of the continent’s largest banks to conceal their true exposure to risky government debt of peripheral euro zone nations like Greece, Spain, Portugal and Ireland. Consequently, the surprisingly rosy results of the stress test failed to paint an accurate picture of the health of Europe’s banks. The story came on the heels of an announcement from Germany’s banking body that said the nation’s largest banks may need another 100 billion euro’s in capital under proposed banking reforms. Data overnight added to the single currencies heavier tone. German industrial orders fell by 2.2%(m/m) in July as a result of a sharp decline in foreign orders. The drop in external demand coincides with a rise in the price of the euro this summer and suggests that Europe’s recovery is likely to lose steam into the year-end.

AUD: Australia’s Labor Prime Minister barely held onto power by forming a coalition government with independent and Green lawmakers. The new government is likely to push ahead with a controversial 30% tax on the nation’s dominant mining sector and could go ahead with a new initiative to limit carbon emissions. Both plans are seen as anti-business and could stifle the nation’s recovery. Separately, the Reserve Bank expectedly left lending rates unchanged at 4.5% for the fourth month in a row.

GBP: The broad decline in risk appetite across global markets and the steep slide in equities undermined the appeal of the pound, which fell to a six-week low overnight. Last week’s batch of soft U.K. economic data highlighted concerns about a loss of momentum in Britain’s recovery. Additional weakness in global markets should keep the pound vulnerable across the board. 

Apprehensive hiring by American companies due to high levels of uncertainty on the fiscal and broader economic outlook has resulted in stubbornly sluggish job growth, which threatens the sustainability of the recovery and could result in additional policy stimulus from the Fed. Disappointing figures this morning would likely result in further declines for the greenback, despite any reduction in broader risk appetite, as they would highlight the seeming underperformance of the U.S. economy and raise the risk of additional monetary easing from the Fed. 

The euro got a limited boost from data showing better than forecast services and retail sales data for the 16-member bloc. The single currency stands to benefit from another disappointing jobs number in the U.S. this morning, which would contrast the recent strength of euro zone economic figures and the steadily improving outlook for the 16-member economy. 

Sterling remained pressured by another batch of soft economic data, this time on the U.K. economy’s dominant services sector. A string of downbeat reports this week have dampened the outlook for Britain’s recovery and have left the pound vulnerable to continued losses in the weeks ahead.

EUR: Euro zone economic data once again highlighted the seeming outperformance of the 16-member bloc’s economy recently. Figures showed euro zone PMI for the services sector improved from 56.1 in July to 56.2 in August, just above expectations. Separately, figures showed euro zone retail sales rose sharply by 1.1%(y/y), topping forecasts for a 0.6%(y/y). The recent uptick in euro zone economic data was acknowledged by ECB President Trichet in yesterday’s post-Governing Council press conference. Mr. Trichet called current policy appropriate, he suggested that emergency facilities for the banking sector would be adjusted as needed and he announced that the central bank’s economic forecasts were upgraded for 2011. That contrasts the increasingly cautious outlook on this side of the Atlantic. While the euro will remain underpinned over the very near term by the diverging outlooks for the U.S. and euro zone economies, another flare-up in risk aversion or renewed concerns about the bloc’s credit markets would likely see it re-test recent lows.  

GBP: While the pound managed to gain against the generally weaker greenback, its upside was limited by another batch of disappointing economic data overnight. Figures showed a drop in the U.K.’s dominant services PMI to 51.3 in August from 53.1 in July, well below the forecast for 52.9. The data comes on the heels of equally disappointing U.K. manufacturing and construction PMI reports earlier this week and fans concerns about Britain’s economy losing steam into the second half of the year. The pound remains vulnerable, even against a heavier dollar, if upcoming data confirms that the risk of a double dip has increased, if equity and broader asset markets suffer as a result of risk aversion or if strict government budget cuts begin to weigh on growth.  

CHF: The Swiss franc pared some of its recent gains against the greenback and the euro after cooler than expected inflation figures overnight. Swiss CPI came in at 0.0%(m/m) in August, below forecasts for a 0.1%(m/m) rise. While the data will not set off any deflation alarms, it was the fourth month running that Swiss CPI came in at zero or lower. The data provided investors with an excuse to book some profits on the franc’s impressive run up recently.

USD: Non-farm payrolls fell by 54K in last month, much better than the 100K decline expected. Importantly, July and June saw revisions that added a total of 123K new jobs to the economy. The unemployment rate rose to 9.6% as expected and average hourly earnings rose nicely by 0.3%. On balance, the figures were far better than many had feared and should, at least for now, reduce some discussion of additional Fed policy stimulus. While the markets remain extremely choppy, the dollar initially soared against the yen and the Swiss franc but slipped against the euro and higher yielders like the AUD.  

The euro was mostly unmoved by the ECB’s expected announcement that it left the 16-member bloc’s lending rates unchanged. Investors await this morning’s post-meeting press conference by ECB President Trichet for further direction. Any hint that a recent string of upside surprises to euro zone economic data could bring in the timeline for eventual policy normalization by the bank would see the single currency extend its recent gains against the greenback.

Sterling slid against the dollar and euro after weaker than expected construction and housing data fanned concerns about the U.K.’s recovery losing momentum. Sterling remains vulnerable to additional signs of economic moderation, softer equity prices and concerns that budget cuts will further slow the U.K.’s fragile recovery.

The Swiss franc hit a nine-month high against the dollar after an upside surprise to Swiss Q2 GDP assuaged concerns about the currency’s appreciation choking off the nation’s economic recovery.  

GBP: Data overnight showed a marked slowdown in construction activity in the U.K. last month and another decline in the nation’s home prices. Construction PMI fell to 52.1 in August from July’s 54.1. The Nationwide home price survey showed a drop of 0.9%(m/m) last month, the steepest decline in home prices since February. Particularly concerning is the fact that a nascent housing market and building rebound contributed to the U.K.’s surprisingly strong performance in the second quarter. Recent data have painted a picture of a U.K. economy that is losing momentum, at a time when the impact strict budget cuts have yet to be felt on growth. Sterling remains vulnerable, especially if tomorrow’s PMI for the dominant services sector confirms a broad slowdown in economic activity. Moreover, soft U.S. jobs data on Friday could weigh on global asset prices and further undermine the appeal of the British pound.   

CHF: The Swiss franc rose toward a nine-month peak against the greenback and a record high against the euro after data showed the Swiss economy grew by 0.9%(m/m) in Q2, topping expectations for a 0.8%(m/m) rise. Separate news showed a healthy 4.8%(y/y) rise in retail sales. The data highlighted the Swiss economy’s relative resilience in the face of soft global demand and a strengthening currency. It also diminished the likelihood that the SNB will rush back into the market to try to weaken the franc. Soft U.S. data tomorrow and mounting concerns about the global economic recovery should keep the franc’s safe-haven appeal in high demand.   

SEK: Sweden’s crown rose to a three-week high against the dollar and a two-year peak against the euro after the Riksbank expectedly raised borrowing costs by 25 basis points to 0.75% and signaled that further rate hikes would be required to bring lending rates to more normal levels for its recovering economy.

USD: US weekly jobless claims fell for the second week running to 472K from a revised 478K, slightly better than the 475K expected. While this week’s claims data is not included in the set of statistics for tomorrow’s payrolls numbers, the lower than forecast initial claims did suggest that the jobs picture may not be as dire as some had feared.

EUR: The euro initially firmed as a result of ECB President Trichet’s comments in his post-meeting press conference. Mr. Trichet maintained that current monetary policy is appropriate and that liquidity operations for the banking sector would be extended as needed. However, Mr. Trichet acknowledged the recent string of strong economic data and the ECB’s official forecasts for growth were upgraded significantly as a result. That contrasts the growing pessimism surrounding America’s recovery. The euro could benefit further over the near term from data that highlights Europe’s seeming outperformance.

Chinese data overnight showed a rebound in the nation’s key manufacturing sector, which helped quell some concerns that the world’s number two economy and engine of recovery may be slowing faster than anticipated. The news helped assuage market concerns about the global recovery losing momentum and benefited commodities and higher yielding currencies.

The Aussie stood out as an outperformer overnight, not only because its economy stands to benefit from increased demand from China, its largest trade partner, but also as a result data that showed the fastest pace of expansion in the economy in three years in the second quarter. The news revived hopes for additional monetary policy tightening by the RBA later this year.

Sterling failed to advance much against the otherwise weaker dollar after data showed that factor activity slowed much more than expected in August. The disappointing data fanned concerns about Britain’s economy losing momentum after its impressive performance in Q2. 

Investors await key U.S. data this morning including ADP’s private sector employment data, construction spending and the ISM manufacturing sector report.

CNY:  China’s all important manufacturing sector rebounded in August, allaying some concerns that Beijing’s attempt to let the air out of a potential bubble in credit and real estate markets was slowing the overall economy too aggressively. China’s official PMI manufacturing survey rose from 51.2 to 51.7 last month, the first increase in three months. A separate report compiled by HSBC also rose quite sharply last month. On balance, the data from China helped alleviate some of the market’s concerns about the global economy losing steam in the second half of the year. Stocks, commodities and higher yielding currencies all benefited at the expense of the lower yielding greenback overnight.

AUD: Australian GDP for Q2 rose by 1.2%(q/q), topping expectations for a 0.9%(q/q) increase, which was the economy’s fastest pace of expansion in three years. Improving trade with Australia’s Asian neighbors and better than expected consumer spending led to the strong growth numbers for the second quarter. The data helped revive some hope that the Reserve Bank of Australia, which had been seen on hold following some disappointing data recently, could have additional policy tightening up its sleeves later this year. The AUD’s improving yield outlook along with the broad rise in risk appetite overnight helped push the Aussie to a two-week high.  

GBP: British economic data overnight showed a sharper than expected slowdown in factory sector activity in August. Manufacturing PMI fell to 54.3 last month from July’s 56.9, well below the forecast for 57.0 and the lowest reading for the PMI since November 2009.The news underscored market concerns about the British economy losing some momentum in to the second half of the year. The seeming slowdown in the economy comes as the British government plans on implementing a host of strict spending cuts and tax hikes aimed at shoring up its dismal public finance. While the pound managed to hold its own against the otherwise weaker dollar, it fell sharply in all of its other crosses. Sterling remains vulnerable if upcoming data confirms a slowdown in the U.K. economy or if global investor sentiment sours, pushing down equity prices and undermining demand for riskier currencies.    

USD: Data compiled by America’s largest payroll company, ADP, showed that the U.S. economy shed 10,000 private sector jobs in August, confounding expectations for an increase of 19,000. It was the first monthly decline in the report since April. The figures highlight the softness in America’s labor markets, which is likely to keep any meaningful recovery in the broader economy under significant pressure. The dollar initially extended its losses in the wake of the data. Investors await this morning’s construction spending and ISM manufacturing data for further direction.  

Investors continue to test the Bank of Japan’s resolve by pushing the yen higher across the board, despite the fact that the BOJ announced a new round of monetary easing this week. Market participants see the latest steps to jumpstart Japan’s struggling economy and weaken the yen as largely insufficient. Continued declines in global stocks would likely see the yen retest its recent 15-year peak against the greenback. 

Solid German jobs data failed to lift the euro overnight. The good economic news was largely offset by mounting worries about the global recovery and broad-based risk aversion. The euro is likely to suffer in an environment of moderating risk appetite given lingering worries about the continent’s debt and banking issues.

Strong Australian retail sales and current account data had only a short-lived impact on the Aussie, which eventually succumbed to selling pressure amid a backdrop of sliding stock and commodity prices..

U.S. Case/Shiller home prices, consumer confidence, the Chicago PMI and the FOMC’s August meeting minutes are on tap today. Canadian Q2 GDP is also due out.

JPY: The yen’s upward trajectory remained in-tact overnight, despite the BOJ’s latest monetary easing steps announced yesterday. The Bank’s increased loan operations aimed at increasing the money supply were seen by market participants as too little too late and had virtually no impact on the yen. Additionally, while policymakers have threatened to take aggressive steps to halt the currency’s rise, the market currently sees very little chance of yen-weakening intervention. Consequently, the currency’s upside remains the path of least resistance, especially if investors become increasingly worried about the global economic outlook and continue to dump stocks, commodities and other risk assets.

CHF: The Swiss franc rose to a new seven-month peak against the greenback and a new record high against the euro, in-line with the broad-based flight to safety across financial markets. Because the franc is seen as a traditional safe harbor, it tends to benefit during periods of economic uncertainty. However, the franc’s rise threatens the nascent recovery of its export-lead economy. Officials in Switzerland have intervened many times since last March to weaken the franc against the euro. The fact that it is back at record highs, highlights the ineffectiveness of currency intervention over the long run. Nevertheless, continued gains for the franc against the euro, could see the Swiss National Bank return to its strategy of selling francs to slow the currency’s export-damaging rise. 

EUR: The number of unemployed Germans fell by 17,000 in August, which was slightly below the drop expected but still the lowest level of total unemployment in the euro zone’s largest economy since November 2008. It was the latest sign that the recovery in the 16-mebmer bloc is outpacing the rebound in the U.S. Still, the single currency’s upside will remain limited in an environment of mounting concern about the global outlook. A slide back into recession by the U.S. would undoubtedly have a negative impact on the euro zone’s export lead recovery as well.   

AUD: The Aussie fell in overnight trade despite a solid print for retail sales in July (up 0.7%m/m vs. expectations for a 0.4%m/m rise) and a larger than expected narrowing of the nation’s current account deficit. The high-yielding AUD instead took its cue from sliding global stock and commodity prices. Even if upcoming data revives expectations for further RBA policy tightening this year, the Aussie will suffer in an environment of mounting global recovery concerns.

CAD: The CAD was pressured by the broad drop in commodities like oil, which fell by over 1.3% to under $74/ barrel. Adding to the loonie’s heavier tone, Q2 GDP printed at 2.0%(annualized), significantly below the 2.5% expected. 

An emergency Bank of Japan meeting held overnight failed to arrest the yen’s broad upward momentum. Japan’s central bank announced another round of monetary and fiscal easing designed to jump-start the nation’s struggling economy and to flood the market with liquidity to slow the yen’s export-damaging rise. However, market participants saw officials’ move as too little too late and bid the yen higher against the greenback and the euro. 

The single currency failed to capitalize on more positive economic news overnight. Data showing a solid rise in euro zone economic sentiment could not offset the single currency’s losses against the resurgent yen, which weighed on the euro against the dollar as well. While the euro could stand to gain from disappointing economic data on this side of the Atlantic this week, its upside will remain limited by concerns about the global economic outlook and worries about the continent’s debt and banking problems.

Investors await U.S. personal income and spending data for July as well as a speech by Dallas Fed President James Bullard this morning.

JPY: In an emergency meeting by the Bank of Japan overnight, monetary policy officials announced another round of measures aimed at helping lift Japan’s struggling economy and slowing the yen’s steep ascent. The BOJ said it will increased the supply of fixed-rate loans provided to the nation’s banking system to ¥30 trillion from ¥20 trillion, essentially adding to the money supply in the hope that banks will increase lending. The BOJ said the monetary easing would be followed up by further measures, including fiscal easing, to be announced tomorrow with the Ministry of Finance. Market participants were unimpressed by the moves, which were seen as little more than a symbolic gesture by officials struggling to address the nation’s anemic economy. The yen pared earlier losses to rise to highs of the session against the greenback and the euro. Officials’ insufficient actions are likely to prompt market participants to continue testing the yen’s upside and could result in the currency revisiting last week’s 15-year peak against the dollar and nine-year high against the euro. 

EUR: Euro zone economic sentiment rose from 101.1 in July to 101.8 in August, better than market expectations and the fifth-straight improvement in economic morale. It was the latest in a long string of economic indicators that have topped expectations and contrasted dismal economic news on this side of the Atlantic. The euro’s steep losses against the yen dampened its upside against the greenback overnight. Going forward, the euro may enjoy some gains this week if U.S. data comes in below consensus forecasts. However, its upside may prove limited if worries shift from the U.S. economy to a more global scale. Under such a scenario, lingering issues like Europe’s banking and sovereign debt problems will be more scrutinized by risk averse global investors.

USD: The dollar ticked up against the euro and pared some of its losses against the Japanese yen after data this morning showed that personal income rose by only 0.2%(m/m) in July, undershooting expectations for a 0.3%(m/m) rise. However, personal spending rose by 0.4%(m/m), topping expectations for a 0.3%(m/m) increase and marking the fastest rise in consumer spending in four months. The seeming resilience of U.S. shoppers in the face of falling home prices and stagnant job creation suggests a lower risk of another dip in America’s economy.  While the dollar initially benefited from this morning’s news, its upside could falter if equity markets rally and prompt investors to seek higher yielding alternatives to the greenback.

The other major event risk of the session will be a closely watched speech by Fed Chief Bernanke at the central bank’s annual symposium at Jackson Hole Wyoming. Given the marked deterioration in America’s recent economic data, investors will be paying close attention for any hints that the Fed could embark on another round of quantitative easing (QE), or asset purchases in support of the economy. Because QE amounts to the Fed printing money to purchase assets like agency and Treasury bonds, any talk of additional policy stimulus from the Fed would severely dull the greenback’s newfound luster.   

The yen slipped further off of its 15-year peak against the dollar after Japan’s Prime Minister said he would meet again with the head of the Bank of Japan when he returns from Jackson Hole. He added that recent yen strength can harm the economy and financial system. The increased jawboning by Japanese policymakers has prompted some market participants to trim bets on continued JPY gains.

Sterling failed to post any meaningful gains in the wake of a slight upward revision to Q2 GDP in the U.K. Investors were cautious ahead of this morning’s U.S. data and Bernanke speech.

JPY: The Japanese yen slipped further off of this week’s 15-year high against the greenback and nine-year peak against the euro. Overnight Japanese Prime Minister, Naoto Kan said he would meet with BOJ Governor Masaaki Shirakawa when he returns from attending the Fed’s annual meeting in Jackson Hole, Wyoming. Combined with renewed concerns about the potentially damaging impact of the yen’s across-the-board rise, Mr. Kan’s comments added to a chorus of official protests about the currency’s appreciation and have raised the risk of near-term policy action by the BOJ. Investors are betting on the BOJ ramping up policy stimulus with additional asset purchases and increased liquidity injections to the banking sector. Moreover, market participants do see increased risk of JPY-weakening intervention if the central bank continues to see currency levels as a headwind to its already feeble economy. While the yen may fall further in the event of BOJ policy action, continued worries about the global economy and weaker equities should ultimately keep its upward trajectory in-tact.

GBP: Britain’s economy grew by 1.2%(q/q) the second quarter of 2010, slightly better than the 1.1%(q/q) originally reported. The marginal upward revision to the data had very little positive impact on the pound ahead of this morning’s event risk in the U.S. In addition, investors are looking at this data in a somewhat more skeptical light than they did when it was originally released last month. Recent downside surprises to British housing data along with the view that government spending cuts and tax hikes will eat into growth in the quarters ahead, suggests that the relatively impressive performance of the U.K. economy will not be sustained into the second half of the year. Consequently, the pound remains vulnerable to additional loses, especially if market sentiment sours further amid a backdrop increasing global recovery concerns.

USD: U.S. GDP for the second quarter of 2010 was revised down to 1.6%(annualized), slightly above the 1.4% forecast. While the data does confirm that the world’s largest economy entered the second half of this year with much less momentum that originally expected, it also suggests that things may not be as dire as some have feared. Surprisingly, consumer spending, which makes up over three quarters of the U.S. economy, was revised up from an originally reported 1.6%(q/q) to 2.0%(q/q). The dollar initially firmed across the board on the news. However, its upside may be limited given the fact that data so far in Q3 have pointed to further loss of momentum in the economy, which keeps the risk of a double dip elevated.  Investors await the University of Michigan’s consumer sentiment data and Fed Chairman Bernanke’s speech for further direction.   

The euro rebounded off or recent lows as a result of the bounce in European equities overnight and investors’ desire to book profits on its recent declines against the greenback and the yen. Impressive German consumer confidence data added to the single currency’s improved tone and once again, contrasted the very disappointing string of news on this side of the Atlantic. While the euro may enjoy additional near-terms gains, its upside should prove very limited, especially in an environment where investors are growing increasingly nervous about the global economic outlook.

The yen held near a 15-year peak against the greenback and nine-year high against the euro overnight. Traders have become more cautious about pushing the yen higher amid increased talk of possible BOJ intervention. Still, additional yen gains are likely, especially in the event of another downturn in stocks or downside surprise to U.S. economic data.

Investors will look to this morning’s weekly jobless claims for near-term direction. A push above the current 500,000 level in initial claims would highlight the weakness in America’s labor markets fan concerns about a double dip recession.

EUR: The euro managed to rebound against the greenback and the Japanese yen overnight as a slightly improved mood throughout global financial markets prompted some profit taking on recent moves. Investors cautiously exited the relative safety of dollar investments and pared back bets against the euro. Data overnight showing a rise in German consumer confidence from a revised 4.0 to 4.1 topped market expectations and marked a two-year peak for consumer morale in the euro zone’s largest economy. The figures once again highlight the view that Europe’s recovery is outpacing that of the U.S.’s, where momentum appears to have come to a halt. Upside surprises to German data however, are likely to have only a limited positive impact on the euro because most of the rest of the 16-member bloc remains mired in a state of economic malaise. Moreover, the euro’s upside will remain very limited in an environment where the global economic outlook is becoming increasingly unclear. Nevertheless, the euro may enjoy additional near-term gains against the dollar if equities bounce further off of their lows today.  

JPY: The yen held near a 15-year peak against the greenback overnight. Investors pared some exposure to the high-flying yen as a result of increased chatter about possible Bank of Japan intervention to weaken its currency. This week’s annual central bankers meeting in Jackson Hole Wyoming will be attended by the BOJ’s governor, an announcement that sparked speculation that the yen strength may become a topic of discussion. However, coordinated intervention to weaken the yen remains an unlikely scenario at current levels. Still, another flair-up in risk aversion or another downturn in equities could quickly see the yen resume its ascent, which would raise the risk of some form of policy response by Japanese officials.

GBP: Sterling rebounded off of this week’s one-month low against the greenback, in-line with the general improvement in market sentiment and the nascent recovery in equity markets overnight. Going forward however, the pound could suffer if sentiment sours amid more doubts about the global recovery. Moreover, a loss of momentum in the U.K. economy in the second half of this year would revive concerns about a double dip recession and add to GBP headwinds. 

USD: U.S. weekly jobless claims fell from a revised 504,000 to 473,000 last week, better than the 490,000 expected. Continued claims fell to 4.45 million from 4.51 million. The upside surprise to the initial claims numbers come as a pleasant surprise amid an otherwise horrid string of U.S. economic data recently. While these figures are not likely to meaningfully improve the outlook for the U.S. recovery, they should contribute further to a slightly improved tone today and could sap some more of the dollar’s safe-haven appeal in the very near-term.  

The Japanese yen, which rose to a new 15-year peak against the dollar and a nine-year high against the euro in the wake yesterday’s horrid U.S. housing data, pared some gains overnight. Japan’s Nikkei news agency reported that policymakers are considering unilateral currency intervention if the yen’s moves remain one-sided. While continued yen gains remain likely, further talk of intervention may temporarily slow its ascent.

The euro failed to hold gains in the wake of a key German business confidence report rose to a new three-year high. The good news was somewhat off-set by lingering credit worries after Ireland was downgraded late yesterday by S&P. Strong German data continues to contrast disappointing figures from the U.S. Despite that, the euro will have a difficult time sustaining gains, given ongoing credit and banking sector worries and the view that the bloc’s growth momentum will not be sustained.    

JPY: The yen soared to a new 15-year peak against the dollar yesterday after data showed U.S. existing home sales fell at a record pace last month. Dismal U.S. economic data have depressed U.S. bond yields across the curve to record lows, decreasing the appeal of dollar-denominated assets for yield-hungry Japanese investors. The yen’s rally acts as a major headwind for hits feeble economy, undermining demand for the nation’s exports, the lifeblood of its economy. The slide of Japanese shares to a new 16-month low overnight highlights the dismal outlook for the nation’s firms amid a backdrop of an anemic domestic economy, declining growth abroad, a rising currency and persistent deflationary pressures. Yesterday, Japan’s Nikkei news agency reported that policymakers were considering currency market intervention or additional monetary easing to weaken the yen and mitigate deflationary pressures. While unilateral currency weakening may slow the yen’s rise, it is unlikely to have a lasting impact if global economic concerns continue to weigh on risk appetite.

EUR: The euro remained under pressure for much of the overnight session after Standard & Poor’s downgraded Ireland’s credit rating late yesterday. The move was not a complete shock to the market but did nevertheless revive lingering concerns about sovereign debt in Europe. The euro managed to pare some of its losses after Germany’s closely watched Ifo survey of business morale jumped to 106.7 in August from July’s 106.2, well above expectations for a decline to 105.7 and  new three-year peak. The surprisingly strong German data of late have contrasted the overwhelmingly disappointing U.S. data and suggest that Europe will likely outperform the U.S. for the remainder of the year. Such a scenario would indeed limit euro losses going forward. However, an increasingly risk averse mood throughout global markets will weigh on the euro against the dollar. Moreover, further signs that rest of Europe is lagging far behind Germany and France would also keep EUR gains in-check.

CAD: The Canadian dollar touched on a seven-week low against the greenback amid a broad decline in global stocks and lower commodity prices. Domestic data north of the board has also added to concerns that Canada’s previously resilient economy is losing steam. The loonie remains vulnerable to further declines amid a backdrop of weak risk appetite and diminishing hopes for additional rate hikes this year by the BOC.

USD: U.S. durable goods orders rose by only 0.3%(m/m) in July, well below expectations for a 2.8%(m/m) rise. Ex-transports, orders fell by 3.8%(m/m), while a closely watched gauge of business spending tumbled by 8.0%(m/m). The disappointing data this morning adds to a growing list of signs that America’s recovery is losing momentum. The greenback initially gave up some of its overnight gains against the euro and the yen. 

The yen soared to a new 15-year peak against the dollar amid the sharp declines in equities and a growing view that Japanese authorities will not act to stem its recent ascent. A meeting by Japan’s Prime Minister and head of the Bank of Japan yesterday yielded no concrete plans by authorities to slow yen strength, broadly seen as undermining demand for the nation’s key exports. While there is little risk of immanent intervention by authorities, continued and sustained gains for the yen will likely result in some form of action by policymakers to limit its gains.

The euro fell sharply against the dollar, the yen and the Swiss franc, all seen as safer investments than the single currency amid an increasingly clouded global economic backdrop. Relatively strong euro zone industrial orders data failed to limit the euro’s across-the-board losses overnight.

Broadly weaker commodities, like crude oil, which fell to a seven-week low under $72/barrel, weighed on the dollar bloc group of currencies from Australia, New Zealand and Canada. Further declines in risk appetite and an uncertain global economic outlook will keep this group vulnerable to additional losses in the weeks ahead.

JPY: Broad-based risk reduction by global investors continues to fuel yen gains across the board. The dollar fell to a new 15-year low against the yen, while the euro tumbled to a new nine-year trough. The yen’s low yield leaves it vulnerable to selling against higher yielding assets during periods of relative market stability and optimism. However, during periods of economic or financial market uncertainly, those riskier, higher yielding positions are usually unwound, forcing investors to buy back the Japanese yen. Additionally, traders currently see little chance that Japanese policymakers will step in to slow the yen’s export-damaging rise. The market however, may be underestimating the potential for near-term policy action by monetary officials. Japan’s economy remains extremely fragile, as highlighted by its meager 0.1% pace of growth in the second quarter. Because exports represent a key engine of growth for Japan, monetary and political officials are unlikely to sit idly much longer while the strength of the yen potentially undermines an already anemic economic situation.  

EUR: Euro zone data overnight showing a 2.5%(m/m) increase in industrial orders in June, well above the 1.5%(m/m) expected, failed slow the single currency’s slide to a new one-month low against the resurgent U.S. dollar. Instead, investors continued to abandon all assets with even the slightest risk profile amid an increasingly clouded global backdrop. The euro remains vulnerable given the view that Germany’s recent economic performance is unlikely to be sustained into the year-end due to declining demand for its exports from a slowing global economy. Persistent debt and banking fears will likely gain more traction as investors become more and more selective of which assets they hold amid an increasingly uncertain global economic outlook.

GBP: Sterling tumbled to a new one-month low against the dollar, in-line with the broad decline in risk assets like equities. Adding to the pound’s broadly heavier tone were comments from Bank of England policymaker Martin Weale, who said that the bank’s own growth forecasts may be overly optimistic. His comments played up concerns about a double-dip recession and reinforced the view that the U.K.’s impressive performance in Q2 would not likely be sustained in the quarters ahead.

CAD: The Canadian dollar slipped to a new seven-week low against the greenback amid a broad pullback in stocks, commodities and risk appetites across financial markets. Canadian retail sales rose by 0.1%(m/m) in June, well under expectations for a 0.4%(m/m) rise. Ex-autos, sales fell by 0.5%(m/m), confounding expectations for a 0.1%(m/m) rise. Recent soft data, including a much cooler than expected reading of CPI, suggest that Canada’s previously resilient economy may be losing steam and greatly undermine expectations for further policy tightening from the Bank of Canada.