By Omer Esiner of Travelex
The U.S. dollar rallied across the board as a sharp decline in investors' appetite for riskier assets saw capital flow back into traditional safe-haven assets like the greenback, U.S. government bonds and the Japanese yen. Friday's announcement from the
Securities and Exchange Commission
that it had filed fraud charges against banking giant Goldman Sachs sent shockwaves throughout financial markets and prompted a wave of profit-taking in riskier assets that had performed so well over recent months.
The pullback in equities and risk appetite was furthered by renewed concerns about sovereign credit risk in the euro zone. A meeting between the IMF, the European Central Bank and leaders of the EU, which was requested last week by Athens, was postponed due to a cloud of volcanic ash that has grinded air travel in Europe to a halt. Uncertainty over how any aid package will be applied and whether Germany will veto assistance for Greece prompted a widening of credit spreads between Greek and German bonds, a clear indication of investors' nervousness.
Other risk assets like commodities and currencies, like the AUD, NZD and CAD, who depend on global demand for resources, came under sharp selling pressure as well. Crude oil slipped by nearly $2.50/barrel to a three-week low, which sapped much of the Canadian dollar's recent strength. A quiet data calendar will keep moves in equities and risk assets in the spotlight today.
: The U.S. dollar rose to a one-week trade-weighted high overnight, broadly supported by a flood of safe-haven flows out of risk assets. The broad flight to safety was triggered by Friday's bombshell that was dropped by the SEC in its case against banking giant Goldman Sachs.
Goldman was charged with fraud by the SEC in connection with a debt deal involving subprime mortgages. While the story may have only limited implication to the longer-term outlook for currency markets, it did trigger profit-taking in equities, which had risen so sharply over recent months.
Global stock indices were trading at their highest levels since late 2008 and were largely seen as due for a correction anyway. The Goldman story may prove to be a catalyst for a longer-term pullback in stocks, which would keep risk appetite under pressure and continue to support the greenback.
Mounting sovereign credit risk in the euro zone added to the USD's broadly improved tone as well. Going forward, the dollar and the yen, traditional safe harbors during periods of market turmoil, should continue to benefit from any sustained pullback in risk appetite, especially against higher yielding and riskier assets like emerging market and commodity currencies.
: The single currency slipped across the board as a result of mounting sovereign credit risk. A meeting of EU, IMF and ECB leaders was postponed due to the volcanic cloud that has impacted European travel since last week. That meeting was requested by Athens last week and is likely the latest step closer to an aid package for the deeply indebted nation. The uncertainty about how such an aid package would be administered is keeping investors nervous about overexposure to EUR assets.
Investors are also worried about Germany vetoing any request for aid from Greece. The spread between Greek and benchmark German bonds widened to record levels overnight in a clear indication of just how hesitant investors are to hold Greek assets. The euro's longer-term outlook should remain severely undermined by debt issues within the euro zone.
: Sterling tumbled to more than a one-week low against the greenback after enjoying a relatively significant run up since late March. The pound succumbed to selling pressure amid a backdrop of generally soft risk appetite, broadly in-line with the selloff in other risk assets.
Following last week's political debate, polls have shown that the Liberal Democrats, Britain's third party, have grown increasingly popular among voters. Such a scenario is seen as robbing votes from the Conservatives, who have enjoyed a very narrow lead over the incumbent Labour Party. Poll results that point to an increasing likelihood of political gridlock will continue to undermine the GBP.
: The Canadian dollar fell to a three-week low against the greenback as risk appetite suffered in the wake of the Goldman Sachs story and renewed sovereign risk in the euro zone. Commodities like crude oil, which slipped to a three-week trough under $81/barrel, are broadly lower this morning, which is adding to the loonie's generally heavier tone.
The Bank of Canada is not expected to adjust lending rates at tomorrow's meeting, but acknowledgment of an improving economy could help the CAD regain its footing.
Omer Esiner serves as the Senior Currency Market Analyst at Travelex, Inc. a global financial institution specializing in corporate foreign exchange services and international payment solutions. In this capacity, he monitors, analyzes and interprets the economic, financial, political and technical factors that drive the movements of more than 100 currencies for Travelex. Mr. Esiner explains the currency markets' reaction to market events to clients, employees and members of the media.
You can view his daily reports, recording briefings, and quarterly reviews posted
. As an expert in foreign exchange, Mr. Esiner is quoted regularly by the financial media including The Wall Street Journal, CNN, Dow Jones Newswires, Reuters, the Nightly Business Report, National Public Radio, among others. Based in Washington, D.C., Esiner joined Travelex in February 2000. Prior to his current position, Esiner was a currency trader for several years. Mr. Esiner holds a bachelor's degree in economics from the University of Maryland, College Park. He is fluent in Turkish and proficient in Spanish.