By Omer Esiner of Travelex
The dollar was firmer in overnight trading as mounting debt concerns in Europe dampened investor demand for risk and fueled flows into traditional safe harbors like the greenback.
Softer stocks and commodities highlighted the slightly more risk-averse mood overnight, which kept gains in currencies from resource-rich Australia, New Zealand and Canada limited.
The euro slid to a two-week low against the dollar and to a nine-week trough against the pound overnight, as investor nervousness about Greece's ability to finance its deficits kept the single currency under broad pressure.
Europe's statistics agency revised Greece's budget deficit for 2009 up by nearly a full percentage point to 13.6% of GDP. The stark news pushed credit spreads between Greek government bonds and benchmark German bunds to record highs, highlighting the growing lack of confidence in Athens' fiscal situation.
The pound was broadly firmer overnight after public-sector borrowing undershot market expectations and assuaged some concerns about the nation's dire fiscal condition. Generally strong British data this week have boosted hopes of an improving economy and sparked speculation that the Bank of England could move to lift rates sooner than previously expected.
The yen took a hit after Fitch Ratings said Japan was one of the most indebted nations in the world, a status that raises risks to its credit rating.
: U.S weekly jobless claims fell from a revised 480,000 to 456,000, in line with market forecasts. Continued claims inched lower to 4.64 million.
Wholesale prices as measured by the producer price index jumped by 0.7% month over month in March, well above forecasts for a 0.4% month-over-month rise. Excluding food and energy, PPI rose by a much more benign 0.1% month over month. The jump in PPI was largely energy-related and not likely to have any meaningful impact on monetary policy expectations.
Still, the rise in headline inflation and only marginal improvement in initial claims maintained the "risk-off" mood throughout markets and supported the dollar.
: Europe's statistics agency, Eurostat, revised up Greece's budget deficit for 2009 to 13.6% of GDP. (The EU's Stability Pact calls for nations to maintain a budget deficit no greater than 3%.) The news highlighted the dire and unsustainable state of Greek public finances and pushed the spread between Greek and German bonds to yet another record peak overnight.
The cost of insuring Greek debt against default also hit a new record high and is now more costly than insuring both Icelandic and Ukrainian debt. The single currency's direction continues to be largely headline driven. While a bailout for Athens from the EU and IMF is all but inevitable, the details of the financial aid package and the strict fiscal conditions that it would come with remain uncertain. Consequently, the euro should remain severely undermined by Europe's debt issues.
: The pound hovered near the upper end of its recent ranges against the greenback and traded at more than a two-month peak against the broadly weaker euro overnight after government spending data came in slightly better than forecast.
Britain's Office of National Statistics (ONS) said that net public-sector borrowing for the fiscal year ending in March hit 163.4 billion pounds, which was the highest for any year since World War II but still well below original estimates for 178 billion pounds and even a recently revised forecast of 166.5 billion pounds. The government's deficit amounts to 11.6% of GDP, slightly better than Greece, but still at unsustainable levels. Separate data showed that retail sales rose by 0.4% month over month in March, below forecasts but still strong enough to suggest a positive GDP reading for the first quarter, which is due out tomorrow.
Strong figures this week, including yesterday's jobs data and hotter-than-expected inflation on Tuesday have sparked speculation that the BOE could be forced to lift borrowing costs before previously expected. An above-forecast GDP report tomorrow (currently forecast at 0.4% quarter over quarter) would add to rate hike speculation and should see the pound test recent highs.
: The yen suffered after Fitch Ratings said it was one of the most indebted nations in the world and that the absence of a sustained economic recovery would likely see government debt rise further. Such an outlook raised risks to Japan's sovereign credit rating, Fitch said. Total government debt in Japan reached 201% of GDP in 2009, the highest of any nation rated by Fitch. The impact on the yen was limited as the majority of Japan's debt is held by its own citizens. In other word's, the yen would be less vulnerable to losses due to a downgrade of its rating, given that foreign demand for Japanese bonds makes up a much smaller percentage of its debt than other industrialized nations.
Omer Esiner serves as the Senior Currency Market Analyst at Travelex, Inc. a global financial institution specializing in corporate foreign exchange services and international payment solutions. In this capacity, he monitors, analyzes and interprets the economic, financial, political and technical factors that drive the movements of more than 100 currencies for Travelex. Mr. Esiner explains the currency markets' reaction to market events to clients, employees and members of the media.
You can view his daily reports, recording briefings, and quarterly reviews posted
. As an expert in foreign exchange, Mr. Esiner is quoted regularly by the financial media including The Wall Street Journal, CNN, Dow Jones Newswires, Reuters, the Nightly Business Report, National Public Radio, among others. Based in Washington, D.C., Esiner joined Travelex in February 2000. Prior to his current position, Esiner was a currency trader for several years. Mr. Esiner holds a bachelor's degree in economics from the University of Maryland, College Park. He is fluent in Turkish and proficient in Spanish.