By Joe Manimbo of Travelex
NEW YORK (
) -- The U.S. dollar rose sharply higher against most major currencies on Tuesday as a heightened wave of risk aversion spurred strong demand for safe-haven destinations. The euro was one of the weakest major currencies overnight, hitting a two-week low against the greenback, another all-time low against the Swiss franc, an 8-1/2-year low against the Japanese yen and a 19-month low against the British pound.
Renewed jitters about the health of the eurozone banking sector is the main catalyst hurting the single currency. Banks in the 16-nation community that share the euro are due on Thursday to repay €442 billion in one-year loans to the European Central Bank. Uncertainty over whether banks will be able to repay their enormous debt obligations to the ECB roiled financial markets with most stocks overnight down sharply. Investors also fear that banks, having to satisfy such a large debt obligation, might be left with fewer reserves to extend loans, creating a liquidity shortfall.
Despite its otherwise stronger tone, the greenback tumbled to a three-month low against the yen, another traditional safe harbor during times of heightened market turbulence.
The Canadian dollar plunged nearly 1.5% against the U.S. dollar to its lowest level in three weeks. The overnight spike in investor risk aversion, combined with a sharp 2% fall in oil prices to around $76 a barrel, weighed on the resource-rich Canadian currency. Canada's producer price index for May is due out this morning.
U.S. data on home prices in April and consumer confidence for June are set for release Tuesday morning.
The euro sank across-the-board Tuesday on fresh worries about the 16-nation zone's banking sector ahead of a Thursday deadline for some banks in the region to pay back the ECB for hefty loans extended a year ago. Underscoring the single currency's broad overnight retreat, it plunged to a two-week low against the greenback, its lowest level since its 1999 launch against the Swiss franc, a November 2008 low against sterling and to a late 2001 low against the safe-haven Japanese currency. The mere mention of the bloc's financial sector is almost enough to instill fear in many investors. However, coupled with a hefty sum of more than €440 billion that banks in the region owe the ECB this week, investors have little appetite to take on riskier trading practices.
Worries about the financial shape of many eurozone banks overshadowed encouraging news from the bloc overnight. Euro zone economic sentiment surprisingly improved to 98.7 in June from 98.4 the month before. Investors had expected a slight decline in economic sentiment to 98.2 in June. As expected, consumer confidence in the 16-nation area held at -17 in June which marked a slight improvement from the previous month's -18 reading. The improvement in sentiment in the euro area suggests that the weak euro has been somewhat of a boon to exporters in the region.
The Japanese yen rose sharply overnight as concerns about Europe's financial health helped to usher in a fresh wave of investor risk aversion. Highlighting the yen's broad safety appeal, it neared a four-month high against the U.S. dollar and an 8-1/2-year peak against the euro. In addition to its safe-haven status, the yen is also benefiting from a decline in U.S. Treasury yields which has made some dollar-denominated debt less attractive to Japanese investors. The benchmark 10-year U.S. Treasury yield fell below the key 3% threshold, marking a 14-month low.
The Australian dollar collapsed by around 2% against the greenback to its lowest level in two weeks as a sharp plunge in market confidence turned investors away from riskier assets. The price of oil also turned in a multi-percent tumble which weighed heavily on commodity-linked currencies which also include the Canadian and New Zealand dollars.
Canada's producer price index as expected rose 0.3%(m/m) in May from 0.4% increase in April. Compared to a year ago, Canadian wholesale inflation rose 1.4%(y/y) from the 0.3%(y/y) decline the previous month. A weaker loonie in May contributed to the rise in factory prices. In late May the loonie had fallen to its lowest in about six months against the dollar.