Dollar Tumbles After Euro Gets Support

The U.S. dollar Monday tumbled against most of its main rivals after the announcement of a massive aid package to support the euro helped spur a strong rally in riskier assets.
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By Joe Manimbo of Travelex

The U.S. dollar Monday tumbled against most of its main rivals after the announcement of a massive aid package to support the euro helped spur a strong rally in riskier assets.

After the euro plunged broadly last week, European policymakers, in concert with the International Monetary Fund, announced over the weekend a joint 750 billion euro ($975 billion) defense package designed to halt a rout on the single currency. The enormous aid package was also established to give eurozone governments with high debt loads such as Greece, Portugal and Spain, lower-cost alternatives to finance their deficits. World financial markets, which fell sharply last week on fears of a growing European debt crisis, rallied on the news.

Sterling rose against the dollar, taking the bulk of its cue from euro/dollar movements and from the broad improvement in market sentiment. However, the U.K. pound slipped against the euro on lingering political uncertainty stemming from last week's inconclusive British election.

Though it is down sharply against the euro and other risk-sensitive currencies, the buck notched strong gains against the Japanese yen, another safe-haven unit that tends to underperform when investor sentiment rises.

The Canadian dollar rebounded from last week's three-month low against the U.S. dollar, helped by the marked improvement in market confidence after European officials in conjunction with the IMF unveiled a rescue package for the single currency.

EUR:

Europe's common currency rebounded sharply from last week's 14-month low against the U.S. dollar after the announcement of a massive aid package to support the euro was well-received by financial markets.

European Union finance ministers and the IMF's rescue package was designed to put a floor, albeit a tentative one, under the euro after it plunged broadly last week on fears of an escalating debt crisis. The massive aid package was also created to give highly indebted eurozone nations like Greece, Portugal and Spain lower cost alternatives to sell government bonds that are used to help finance their debt.

Investors recently had demanded record high yield premiums on Greek debt given widespread fears that Athens was on the brink of going bankrupt. Portugal and Spain had also recently sent their yield premiums rise sharply on worries that their fiscal positions were set to deteriorate. Although the euro aid package helped to ease some of the deeply negative sentiment toward the single currency, it remains to be seen whether the common currency can sustain its bounce given ongoing concerns on how successful Greece with be at implementing tough austerity measures.

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GBP:

The British pound rallied against the dollar but it declined against the euro as lingering political uncertainty continued to weigh on sterling. The pound recovered off last week's one-year low against the dollar, largely being dragged upward by euro/dollar's surge. Following last week's inconclusive U.K. election, David Cameron's Conservative Party is in negotiations with the Liberal Democrats on forming the next U.K. government.

However, until the next government is officially formed, the pound should remain vulnerable. Investors want to see the next U.K. government take swift action to reduce Britain's record fiscal public deficits.

As expected, the Bank of England left its benchmark interest rate unchanged at 0.5% and announced no changes to its quantitative easing measures. No statement accompanied the U.K. central bank's meeting, which is customary when no changes are announced.

CAD:

The Canadian dollar recovered from last week's three-month low against the U.S. dollar, boosted by the revival in risk sentiment after European officials and the IMF came to the rescue of the single currency. Crude oil prices spiked over $78 a barrel, a gain of more than 4%, underscoring the broad improvement in risk sentiment.

Local data this morning showed that housing starts came in at 201,700 in April, below the 205,000 forecast but above the prior month's upwardly revised 199,200 figure.

USD:

The U.S. dollar tumbled to start the week against its major counterparts as a financial aid package by the EU and the IMF helped to put a tentative floor under the euro. Although investors have questions about the 750 billion euro aid package, such as where will the funds come from and how will they be administered, for now the single currency has received a cautious reprieve from last week's heavy selling pressure that resulted in the single currency's worst week against the dollar since October 2008.