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Dollar Firms on Sovereign Credit Worries

The dollar firms overnight on renewed worries about sovereign credit risk and a resulting pullback in risk appetite.

By Omer Esiner of Travelex

The dollar firmed back toward Friday's nine-month trade-weighted peak overnight, broadly supported by renewed worries about sovereign credit risk and the resulting pullback in risk appetite.

News that Standard & Poor's is considering lowering Greece's credit rating again in the next month fanned concerns about the fiscal health of peripheral eurozone nations and undermined investors' willingness to take on risk. The low-yielding dollar and yen were the biggest beneficiaries of the flight to safety.

Yesterday's relatively dovish testimony from

Fed

Chairman Ben Bernanke, who reiterated his pledge to keep rates very low for an extended period, dented some of the market's hopes for near-term policy tightening. Still, the outlook for the U.S. to outpace most of its rivals in recovery and monetary policy normalization kept the greenback's upside largely intact.

Generally soft eurozone economic data supported the view that the bloc's recovery will likely lag and added to the single currency's broadly heavier tone.

The pound fell to a new nine-month low overnight, weighed down by declining appetite for riskier assets and by dovish comments earlier this week from Bank of England officials.

U.K. monetary officials' cautious outlook for the economy highlighted the view that additional credit easing could be warranted at a time when other major central banks are looking to remove policy accommodation.

USD

: Weekly jobless claims jumped to 496,000 from a revised 474,000. The latest number was well above the 455,000 expected. Continued claims were mostly unchanged from a revised 4.6 million, well above the 4.5 million forecast.

Durable goods rose by 3.0% month over month in January, which was double the increase expected. Ex-transports however, durable goods fell by 0.6% month over month, confounding expectations for a 1.00% increase.

Thursday morning's data undermined some of the recent optimism about a U.S. recovery and pushed the greenback to fresh intraday lows against the yen. The dollar held most of its recent gains against the majority of its other major counterparts.

EUR

: The euro fell back toward last week's nine-month low against the greenback and touched on a new one-year trough against the broadly stronger yen overnight.

The single currency's already shaky stance was dented by news that Standard & Poor's is considering another downgrade of Greece's sovereign credit rating over the next month.

Doubts about Greece's ability to service its swelling debt load have fanned fears about a possible default and have undermined confidence in the euro and the very idea of the monetary union.

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Athens' austerity plan to slash spending and raise taxes has been met by tens of thousands of protesters across the nation and by striking government workers.

Sovereign credit worries should continue to severely limit the single currency's upside in the months ahead.

Economic data overnight showed a surprise drop in eurozone economic sentiment in February, which suggests that the bloc's already anemic recovery lost steam in the first quarter. Separate news showed slower-than-forecast jobs creation in Germany this month.

JPY

: The low-yielding yen soared to near two-week highs against the greenback, the Aussie and the Canadian dollar and a one-year high against the euro overnight.

News of another possible credit downgrade for Greece dampened investors' appetite for risk, which fueled another broad flight to safety.

Much like the greenback, the yen tends to benefit during periods of economic and financial market uncertainty. The yen should find continued support heading into Japan's fiscal year-end in March, where firms typically repatriate overseas earnings back home.

AUD

: The Aussie fell to a two-week low against the greenback overnight, broadly undermined by moderating appetite for riskier and higher-yielding assets.

Soft U.S. economic data and news of another possible credit downgrade for Greece added to investors' aversion to risk.

News overnight that Australian business sentiment jumped in the fourth quarter added to expectations that the country's central bank will resume its policy tightening cycle again when it meets next month. Still the Aussie failed to draw any significant support from the news, instead taking its cue from the general pullback in risk sentiment.

GBP

: The pound fell to a new nine-month low against the greenback and inched back toward Monday's record low against the Canadian dollar overnight. The pound failed to gain any meaningful support from an upside surprise to the Confederation of British Industry's retail sales report. Instead, it remains broadly undermined by this week's cautious comments from a number of Bank of England officials, which essentially highlighted the fact that additional credit easing remains a possibility.

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

here

. 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.