By Omer Esiner of Travelex
The dollar built on its Monday gains to hit new one-year peaks against the euro and a basket of major currencies on Tuesday as a decline in risk appetite and worries about Europe's debt troubles bolstered the greenback.
The euro remained under pressure despite a weekend announcement that leaders from the European Union and the IMF had created a 110 billion euro ($145 billion) rescue package for debt-plagued Greece. Still, much uncertainty remains, with investors questioning whether the loans will be enough, whether Germany will sign off on the deal and whether the aid package will help prevent Greece's troubles from spreading to other highly indebted nations in the bloc like Portugal and Spain. Consequently, Europe's debt problems should help to limit the single currency's upside for the foreseeable future.
The pound fell on Tuesday on uncertainty ahead of Thursday's general election in the U.K. However, the pound's overnight descent was somewhat slowed by a British manufacturing report that showed the fastest pace of growth in 15 years in April.
The Canadian dollar fell, hurt by the overall decline in investor sentiment and by weaker oil prices of less than $85 a barrel.
Australia's currency tumbled despite a quarter-point rate hike by the Reserve Bank of Australia to 4.5%. The RBA's accompanying remarks suggested a slower pace of tightening in the months ahead.
U.S. data for March on factory orders and pending home sales were due this morning at 10 a.m. EDT.
: The euro's downtrend continued overnight on investor worries about the financial health of some of the bloc's weaker economies. Despite a weekend agreement on a 110 billion euro ($145 billion) plan created by European finance officials along with the IMF to help Greece avoid tipping into bankruptcy, the single currency plunged to a new one-year low against its U.S. counterpart.
Market participants now question how effective the deal will be in addressing Greece's debt troubles. To secure the emergency loans, Greece had to agree to fresh belt-tightening measures such as tax hikes and public-sector pay cuts over the next three years. Given strong public opposition, many doubt whether Athens will be successful enough to improve its fiscal position. Investors also fear that other eurozone countries with soaring debt loads such as Portugal and Spain could see their finances worsen. Europe's debt problems are a key headwind to the growth outlook in the bloc, a scenario that could push back the timetable for any ECB policy tightening over the longer term.
More on Europe's Debt Crisis
: The British currency slipped on Tuesday amid the rise in risk aversion and uncertainty surrounding Thursday's U.K. election. Most observers see the U.K. vote as resulting in a hung parliament, which would make it difficult for the incoming government to take action to reduce Britain's fiscal deficit. Despite its weaker tone Tuesday morning, its fall was somewhat cushioned by solid manufacturing data. The U.K.'s PMI survey came in at 58.0 in April, which was the highest since September 1994. Investors had expected a reading of 57.4 in April from 57.3 the previous month. The surge in April's reading was largely due to a pickup in export orders and likely helped by the weaker pound, which makes U.K.-made goods less expensive overseas.
: The Australian dollar lost ground even after the Reserve Bank of Australia boosted interest rates by 25 basis points to 4.5%. The RBA's accompanying remarks hinted at a slower pace of tightening in the months ahead. This caused investors to rethink the outlook for higher rates in the region. The overall pullback in risk sentiment also tarnished the appeal of this growth-sensitive currency.
: The Canadian dollar fell Tuesday morning as a fresh bout of risk aversion and weaker commodity prices put downward pressure on the loonie. Investors this week will look to local manufacturing data on Thursday and Friday's jobs report for April to help bolster the case for a near-term interest rate hike by the Bank of Canada.
: Although some of the dollar's recent surge is linked to euro weakness, it can also be attributed to improving U.S. fundamentals. Data on Monday showed that U.S. manufacturing activity climbed to its highest level in almost six years in April, while another survey showed that consumer spending increased for the sixth consecutive month in March. On balance, recent U.S. data have pointed to a continuing U.S. recovery, which bodes better for the outlook for
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.