By Joe Manimbo of Travelex
The dollar rose to another four-year peak against the euro overnight. However, the U.S. currency opened Wednesday trading roughly flat against the besieged common currency.
The euro's latest plunge was in response to Germany's plan, announced Tuesday, to ban the naked short-selling of some single currency-denominated assets. This is Germany's latest attempt to help stabilize eurozone financial markets and prevent the type of worldwide market turbulence that was seen during the 2008 financial crisis. Germany's announcement went into effect at midnight German time and is set to last until the end of next March.
Global investors reacted to the ban by fleeing to the safest grades of assets, such as the dollar and the Japanese yen. Riskier assets including stocks, oil, the euro, sterling, the Australian dollar and the Canadian dollar tumbled.
The Canadian dollar neared a two-week low against the U.S. dollar, taking its cue from the broader decline in market confidence. Crude oil sank to $68 a barrel, an eight-month low that also pressured the commodity-linked Canadian currency.
: The euro regained some of its losses to open roughly flat against the dollar Wednesday. However, another tumultuous overnight session saw the single currency tumble to a new four-year low against the dollar, a record low against the Swiss franc, and a multiyear low against the Japanese yen.
The single currency's fall to fresh lows followed news yesterday that Germany imposed restrictions on some types of euro-denominated financial transactions, in an effort to help stabilize the bloc's financial markets.
Effective Wednesday at midnight German time, Germany announced a ban on naked short-selling of some eurozone government bonds. The practice of short-selling occurs when investors sell assets that they have borrowed in advance. Short-sellers hope to profit by returning the borrowed assets at a reduced price. "Naked" short-selling refers to the practice of selling an asset that is not borrowed ahead of time. Observers believe that naked short-selling exacerbated Greece's financial crisis.
German officials hope the ban will help to stabilize eurozone financial markets. So far, however, Germany's trading restrictions have roiled financial markets by adding a new element of uncertainty. Following the euro's steep decline yesterday and overnight, the euro has tentatively regained some footing as investors take a breather to digest the ban's longer-term impact.
: The pound fell to a 14-month low against the dollar, taking the bulk of its direction from euro/dollar movements. The pound was largely unchanged by the release of the minutes from the Bank of England's May 10 meeting. The minutes revealed that policymakers voted unanimously to leave borrowing costs steady at 0.5%.
Sterling is likely to remain on the defensive as the new U.K. government is expected to announce plans by June to reduce its record budget deficit to improve its finances. Although such a plan would help to ease some the sovereign debt concerns that have weighed on the pound, it might come at the expense of softer economic activity in Britain.
: The Australian dollar tumbled to an eight-month low against the U.S. currency as an overnight decline in risk sentiment weighed sharply on this growth-sensitive currency. The Aussie tends to be vulnerable to any type of news on the global growth outlook. The severity of Europe's debt crisis has the potential to derail the global recovery. This is exerting downward pressure on growth-oriented and commodity-based currencies like the Australian dollar and the New Zealand and Canadian dollars.
: The U.S. consumer price index declined unexpectedly by 0.1% month over month in April. This was below the consensus forecast for a gain of 0.1%. Excluding volatile food and energy costs, the CPI remained unchanged in April compared with the month before.
Overall, Wednesday's consumer inflation data paint a picture of tame price pressures in the U.S., a setting that reinforces the
pledge to keep interest rates low for a prolonged period of time. The dollar lost some ground against its major rivals on the news as today's cooler than expected inflation lessened the chance of a Fed interest rate hike this year.