U.S. Dollar Sharply Lower

The greenback softens Monday as riskier currencies rally on no news.
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In a session so far bereft of economic events and data, the dollar finds itself sharply lower as riskier currencies have rallied on the back of, well, nothing. "No news" has proven the catalyst for the rise in pretty much everything against the dollar, which is also licking its wounds from last Friday's Retail Sales report, which showed the first decline in eight months. Data in the U.S. had been firming, albeit not at a pace that many had hoped to see and Friday's figure seems to be giving some pause.

As is often the case when a "risk-on" sentiment pervades markets, Aussie, Canadian and New Zealand dollars are all higher, each reaching levels not seen for a month, and global equities are rallying as well, as traders seem content to up their bets on global recovery. Similarly, the Japanese Yen is a bit softer.

British Pound Sterling was also one of the big winners overnight, not only benefiting from broad dollar weakness, but also from the newly formed (and cleverly named) Office of Budget Responsibility's report that calls for slower growth in the U.K. in 2011 and for a decline in the amount of borrowing the government will have to conduct next year.

Obviously, given the events that continue to unfold just across the English Channel, any decrease in government borrowing is welcomed news; especially in countries that are perceived to have unsustainable deficit levels.

German and French officials are meeting today ahead of the broader EU Summit on Thursday with the hope of aligning the interests and goals of the two largest and most stable member states. Thursday's summit will be closely watched as the countries of the currency bloc are expected to outline new rules (or simply steps they will take to enforce the existing rules) for fiscal responsibility and budget deficit accountability.

This is a big week on the data front as well, with U.S. capital flows data headlining tomorrow and inflation data later in the week. Figures out of the eurozone and Canada will also be of importance.

EUR

: The single currency powered higher in early trading on Monday as investors took advantage of no negative headlines and little data to scoop up some cheap euro. There was one release this morning, and it did provide some support for the euro; eurozone industrial production surged 9.5% in April, the largest jump in nearly two decades. Though this was a good reading, in the current environment, investors are much more attuned to developments in the form of headlines, of which there were very few on Monday.

German and French officials are meeting Monday to get their stories straight ahead of the highly anticipated Summit of EU Finance Ministers on Thursday. Also this week, on Wednesday, France is expected to detail steps to restructure its bloated pension system and Spain is expected to announce labor market reforms. Many feel that now is an opportune time to do so, with the World Cup captivating the attention of many Europeans.

Contested elections in the Netherlands, Belgium and Slovakia are also expected to provide additional headline fodder for traders. Any political uncertainty, especially at times where contentious debate is the norm, could give traders reason to shun the single currency.

GBP

: Like many of its counterparts, sterling was swept up in the move into riskier assets and additionally underpinned by the newly created Office of Budget Responsibility, or OBR, which toned down the expectations that had been set by the previous government that growth would be slower in 2011.

Labor had called for growth of +3.5%. The OBR is now calling for growth of +2.6%. The 2010 forecast was unchanged at +1.3%. More importantly, though, the report also called for a reduction in the amount that the government will need to borrow to finance itself in 2011: only 10.5% of GDP, better than previous estimates, though still high by historical standards.

AUD

: Though officially on holiday today, the Aussie buck hit a new one-month peak on the greenback on Monday. The Aussie has been shining lately on the back of traders placing optimistic bets for global recovery and a hawkish interest rate outlook for the land down under.

USD

: A regular report on Friday from the Commodity Futures Trading Commission detailing the market's currency positions with respect to listed datives showed that positive bets on the U.S. dollar had reached an all time high. Meanwhile, negative bets on the euro were approaching a similar high, which could very well undermine any sustained recovery in the single currency and make any run up, such as the one we are experiencing, short lived. Markets are fickle, though, and a single headline can cause traders to reverse course.