By Joe Manimbo of Travelex
NEW YORK (
) -- The dollar starts the day flat to marginally higher against its global rivals as concerns over the eurozone debt crisis again come to the fore and consumer sentiment data out of Germany disappointed. The euro is slightly lower this morning, hovering just below one-month peaks hit yesterday on the heels of Moody's anticipated downgrade of Greek debt to junk status.
Concerns over private Spanish banks' liquidity also undermined the single currency. The Spanish treasury secretary acknowledged early on Tuesday that some banks in Spain have been experiencing difficulty when attempting to tap interbank lending markets for liquidity -- obviously a reason for concern. Downside was capped, though, by successful sovereign debt auctions in Spain, Belgium and Ireland.
French President Nicolas Sarkozy caved to German demands for tougher enforcement and of euro budgetary rules put forth by German Chancellor Angela Merkel in yesterday's meeting. The two dominant euro powers had been meeting ahead of Thursday's European Union Summit to reign in the profligate spending habits of EU member states that has landed the continent in their current predicament.
The Bank of Japan left rates unchanged, as widely expected, and announced that it would make additional liquidity available to promote growth. The pound fell slightly from a one-month high as inflation data came in a bit cooler than forecast.
Additional data out of the U.K. showed continued recovery in house prices. The antipodean currencies were undermined by a bit of profit-taking late yesterday and into today after the Reserve Bank of Australia hinted strongly that it would remain on hold with respect to interest rates more or less through the summer.
U.S. Capital flows data later this morning are expected to impress, given the "flight to safety" that we have witnessed amid the turmoil. Prior to that, though, we will get a reading of manufacturing activity in the New York
: A number of developments out of the eurozone are combining for a marginally weaker single currency this morning.
First off, yesterday's
downgrade of Greece's sovereign debt
, though widely expected served as a reminder that the eurozone is mired in crisis. This notion was reinforced by comments from the Spanish treasury secretary, who raised concerns about the ability of Spanish banks to access liquidity in eurozone lending markets.
Obviously, an evaporation of liquidity, even temporary, would be crippling for Spain and surely send it hat in hand to the rest of the EU and IMF for a bailout. This had been rumored for some time but downplayed by Spanish and other EU officials. This was somewhat dampened by successful auctions in three eurozone member states, Spain included.
On the data front, the ZEW Economic think tank's monthly forecast tumbled to 28.7 in June, much lower than the 42.0 reading expected. The reading highlights that many concerns remain in Germany as to the current economic environment. All things considered, the euro was able to largely cling to its recent gains falling only slightly from one month peaks.
The big event this week remains the EU Summit on Thursday. Ahead of that, German and French officials seemingly reached an accord yesterday when they announced that they agreed in meetings to a proposal that eurozone member states who persistently breach deficit limits should have their voting rights suspended and that economic governance should be carried out by all 27 member states of the EUR, not simply the 16 in the single currency. France also dropped its demands for the creation of a dedicated body to manage such issues.
: The pound was undermined by a fall in U.K. inflation to 3.4% from 3.7%. The fall, though larger than expected, still puts U.K. inflation well above the 2% targeted by the Bank of England and raises the question of just how long the BOE can maintain an expansionary monetary policy. British house prices also rose at their fastest pace this year in May.
: The New York Fed's Empire State Manufacturing index came in just below forecast at 19.57 in June. Though a stronger reading than May, the figure certainly does nothing to inject a high level of optimism into the market, and the dollar showed no reaction to the reading.
: In a widely expected move, the Bank of Japan left interest rates unchanged at its quarterly policy meeting. It also announced steps to inject 3 trillion yen of additional liquidity into the market to promote growth. The BOJ has been down this well-worn path before with little or no benefit to show for it. The news fell by the wayside as events in the eurozone dominated.
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