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USD: Further Depreciation Seen

The dollar slid Friday to a new one-month low against a basket of currencies and looked vulnerable for further short-term depreciation.

The dollar slid Friday to a new one-month low against a basket of currencies and looked vulnerable for further short-term depreciation as the lack of data and headlines provided no compelling reason for traders to push the buck in either direction. Recall yesterday's weak data out of the U.S. and positive developments with respect to the eurozone credit crisis pushed the dollar to fresh three-week lows against most of its major counterparts.

Late yesterday, the EU member states proposed a number of measures that they agreed to in principal at yesterday's summit in Brussels. Though the steps were positive and euro supportive, markets are not closing the books on the current crisis until passage of the reforms takes place and the measures are implemented. As they say: "The devil is in the details." Yesterday's high-level agreement could fall apart as the member states debate the specifics in the coming months.

The Swiss franc breached record levels against the euro, which should surprise no one after yesterday's SNB announcement that they would be abandoning their franc-weakening intervention campaign.

President Obama made an appearance on the FX news wires this morning as he made a veiled reference to China's exchange rate policy when urging the G20 countries to promote flexible exchange rates. China, not surprisingly, offered no change to their mantra that exchange rates are a sovereign matter and will be dealt with domestically.

The G20 meets next weekend in Toronto. The data docket is more or less blank today, with the only indicator of note being Canadian Leading Indicators for May scheduled for release. Until markets give them any reason to act, traders may be content to sit on their hands and enjoy the World Cup.


: The EU member states met yesterday and agreed in principal to a number of measures that, if successfully implemented, would go a long way to proving to markets that they are willing to swallow the bitter pill of reform and make serious changes to their fiscal spending patterns, which have historically been reckless.

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Among the measures that they agree on was the need for the EU to publicly disclose the results of the stress test on the eurozone's 25 largest banks. This mirrors the steps that were taken in the U.S. at the height of their domestic banking crisis. They also called for member states to submit budgets to the EU for peer review prior to submission to domestic legislative bodies for passage as well as a commitment by member states to subject habitual violators of budget rules to stricter sanctions by their peers. There was also talk of imposing a financial transaction tax within the euro zone.

These measures will all be hotly debated as member states' interests vary widely from state to state. The last measure, for example, is a bit of a sticky wicket with the U.K., as financial services comprise a much larger share of their economy than the other member states'.


: The Canadian dollar had been benefiting of late from the global flight to risk and has also been drawing support from the fact that gold hit new record levels this week. The Loonie's gains this morning have been lackluster, though, as oil has slid slightly. Like everything else, there is simply no catalyst at the moment. Canadian leading indicators for May were released at +0.9, beating forecasts for a rise to +0.7.


: Sterling also traded sideways, though just below one-month peaks, benefiting from the sole piece of data released this morning. When considered with yesterday's strong Retail Sales data, today's reported narrowing of Britain's budget deficit is underpinning the pound and providing hopes that the U.K. may very well have turned a corner on the road to recovery. As with everyone else, though, their ability to sustain this recovery, as evidenced in upcoming economic data, will be the true test.


: President Obama, writing in a letter to G20 member states a week ahead of their meeting in Toronto, urged the body to address financial sector reform and mentioned in a not so subtle jibe at China that foreign exchange rates are best left to float where their value can be determined by markets. China, as has been their mantra, maintained that exchange rate policy is a domestic matter and will be addressed at a time and to a degree of their choosing.