Euro Rises as Investors Buy Equities

The euro stabilized from Monday's lows as investor sentiment in general improved and investors purchased stocks.
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By Joe Manimbo of Travelex

The dollar opened mixed on Tuesday as improved investor sentiment in general helped the euro to stabilize off Monday's tumble to a four-year low. With

stocks in positive territory

, the greenback firmed against the Japanese yen, another currency that tends to underperform when market confidence improves.

The euro's slightly firmer tone came despite a report that showed investor sentiment in Germany, the 16-nation bloc's biggest economy, declined more than expected in May. A lack of fresh negative headlines so far this week out of the eurozone has helped to ease some of the deeply pessimistic views on the outlook for growth in some of the bloc's highly indebted nations that contributed to the single currency's decline Monday to an April 2006 trough.

The pound remained in close range of Monday's 13-month low against the greenback after a rise in annual inflation to a 17-month peak in April suggested the U.K. central bank might need to tighten monetary policy before officials would prefer with British growth seen taking a hit from looming fiscal spending cuts.

The Canadian dollar recovered from Monday's 10-day low against the greenback as upbeat market sentiment and higher oil prices supported the loonie.

EUR

: The euro staged a tentative rebound from Monday's four-year low against the U.S. currency as a lack of fresh negative developments so far this week on Europe's debt crisis have helped to ease some of the decidedly bearish sentiment toward the single currency.

An overall improvement in risk sentiment helped to overshadow a weaker-than-expected report on German investor sentiment. Germany's ZEW economic sentiment index fell more to 45.8 in May, which was below the 47.0 forecast and a marked reduction from 53.0 in April.

Despite the single currency's modestly firmer tone this morning, overall sentiment remained downbeat. The single currency finds itself between a rock and a hard place because the steps that countries like Greece, Portugal and Spain need to take to dig themselves out of debt, like government spending cuts, are the same ones that have dampened the outlook for growth. Consequently, the single currency should have a tough time piecing together a meaningful bounce from its recent lows against most of its chief rivals.

GBP

: The pound kept within arm's reach of Monday's 13-month low against the greenback after consumer inflation soared to a November 2008 high on an annual basis in April. The unwelcome rise to 3.7% year over year in April was higher than the 3.5% forecast. Higher prices combined with forecasts for slower growth resulting from a reduction in government spending are seen as a dilemma for U.K. central bankers. Consequently, the pound failed to capitalize on the improvement in overall risk sentiment, which under different circumstances would tend to support the pound.

AUD

: The Australian dollar firmed off Monday's 15-week low against the greenback. However, its upside was capped by less-hawkish-than-expected minutes from the Reserve Bank of Australia's May 4 meeting. At that gathering, the RBA boosted interest rates for a sixth time in seven months a quarter point increase to 4.5%. The minutes revealed that the central bank could slow the pace of tightening now that the bank deemed monetary policy "well placed for the present." As a result, investors priced in the chance of a slower pace of rate hikes this year, slightly tarnishing the Aussie's yield draw.

USD

: The U.S. producer price index unexpectedly declined by 0.1% month over month in April, against the forecast for a 0.1% month-over-month increase. Producer prices in March increased by 0.7% month over month. However, subtracting volatile food and energy costs, wholesale inflation rose by 1% year over year in April, which was a touch higher than the forecast for a 0.9% increase and the same reading as the month before. U.S. housing starts rose by 5.8% month over month in April which marked a one-and-a-half-year peak and was higher than the previous month's upward revision to 5.0% year over year from the 1.6% year-over-year initial reading.