By Omer Esiner of Travelex
The U.S. dollar soared to a seven-month peak against a basket of its major rivals overnight, boosted by continued worries about sovereign credit risk in the eurozone and by a surprise move by Beijing to tighten credit conditions in China.
Despite yesterday's reassurances from the EU that it stands behind indebted Greece, the euro plumbed to a nine-month trough against the greenback. Similarly supportive comments from the IMF and ECB today failed to assuage investors' worries about Greece's ability to service is burgeoning debt. The lack of details of a proposed bailout of Greece has undermined the single currency and similar concerns about other peripheral eurozone states should keep the EUR's upside very limited going forward.
China surprised markets by announcing a 50 basis-point hike in bank reserve requirements, its second such move this year. The attempt to rein in red hot credit markets and a possible real estate bubble undermined risk appetite by raising concerns on the outlook for Chinese expansion, a key engine of global recovery. Regional exporters like Australia and New Zealand are most vulnerable to decreased Chinese demand, a fact evidenced in the selloff in their currencies overnight.
Investors await U.S. retail sales, business inventories and the University of Michigan's consumer sentiment index due out later this morning.
: U.S. retail sales rose by 0.5%(m/m) in January, better than the 0.5%(m/m) forecast. December's figure was revised up from -0.3%(m/m) to -0.1%(m/m). Ex-autos, retail sales grew by 0.6%(m/m), just above the forecast for 0.5%(m/m). The relative health of the consumer, which makes up over 70% of the U.S. economy, highlighted an improving U.S. outlook and contrasted the very lackluster expansion seen in the euro zone, the U.K. and Japan. The greenback slipped in choppy trade in the immediate aftermath of the data.
: The euro failed to garner any meaningful support from reassurances by the EU, ECB and IMF that they stand behind indebted Greece. In fact, the single currency slipped to a nine-month low against the greenback, a 15-month trough against the CAD and over one-year lows against its Swedish and Norwegian counterparts overnight.
Yesterday, a summit of EU leaders yielded supportive comments for Athens and pledged to provide Greece with financial support if needed. Similarly supportive comments were echoed by the ECB and IMF today. However, investors remain nervous about holding Greek debt, a fact evidenced in the widening of spreads between Greek bonds and benchmark German bunds. The lack of details about a bailout has weighed on the euro, while longer-term concerns about Spain, Portugal, Ireland and Italy should keep any positive impact of a bailout short-lived. Somewhat overshadowed by the sovereign credit concerns, data overnight showed that the eurozone economy grew by an anemic 0.1%(q/q) in Q4, well below the 0.3%(q/q) expansion expected. Stagnation in Germany and contraction in Italy and Spain highlighted the very lackluster recovery in the euro zone and contrasted the much more robust rebound in the U.S.
: The People's Bank of China (PBOC) announced that it raised the reserve requirements for commercial banks by 50 basis points, its second such move in as many months. By requiring higher reserve ratios at banks, the PBOC is essentially draining excess liquidity from the banking system and tightening credit conditions, which have been in hyper growth mode for many months. Yesterday's news that consumer prices were more benign than many had expected in January tempered some concerns that China will be forced to tighten monetary conditions at an aggressive pace. Commodities tumbled on the worries of a slowdown in China, with regional export currencies like the AUD and NZD suffering the most.
: The Canadian dollar held its ground against an otherwise stronger greenback and was up in most of its major crosses, despite the over $1.25/barrel slide in crude oil overnight. The loonie remains generally well supported by its exposure to a rebounding U.S. economy and the general health of Ottawa's balance sheet compared to other G7 nations. The CAD also stood out among dollar-bloc currencies given its relatively limited exposure to a possible slowdown in Chinese demand.
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.