By Omer Esiner of TravelexThe dollar regained its composure overnight, bouncing off of a six-week low against a basket of its major counterparts. Investors this week sold the low-yielding greenback amid a broad improvement in investor risk appetite, largely fueled by pledges from the Federal Reserve and the Bank of Japan to keep monetary conditions extremely simulative to ensure that the economic recovery gains meaningful traction. An environment of loose monetary policy and improving global growth tends to favor higher-yielding and riskier assets like stocks, commodities and emerging-market currencies. Moderating concerns about Greece' credit woes added to the generally improved sentiment throughout global financial markets this week as well. However, a Dow Jones report overnight that Athens may turn to the IMF for financial assistance if no EU agreement for a bailout is reached rekindled concerns about sovereign credit risk and prompted the single currency to pare some of its recent gains. Uncertainty about the future of Greece and similarly indebted eurozone states has undermined the single currency for much of 2010 and should continue to keep its upside very limited in the months ahead. The Canadian dollar remains a standout among major currencies, holding within sight of a 20-month peak against the dollar and a 30-month high against the euro. Crude oil above $82 a barrel and generally positive domestic economic news continue to support the loonie. EUR: The single currency pared some of its recent gains across the board after Dow Jones reported that Greece may seek IMF assistance if a bailout agreement is not reached at an upcoming EU summit on March 25. News flow out of the eurozone has dictated the single currency's direction for the better part of the last four months. Headlines that suggest European officials are closer to a resolution for deeply indebted Greece have lessened investors' concerns over sovereign credit risk and supported the euro, while reports that play up the lack of resolution have fanned worries and undermined the single currency. The Dow Jones story overnight also played up the growing rift between Germany, the eurozone's largest economy, and Greece. A lack of resolution of Greece's debt issues within the EU would be an embarrassment for the bloc and would likely undermine the notion of unity and cohesion within the eurozone, further dampening market demand for euro-denominated assets.
Although the euro may find some additional near-term support from any development that minimizes uncertainty about the outlook for Greece, its upside will likely remain very limited by the view that sovereign credit issues will remain a major drag in the months ahead. USD: U.S. consumer prices were flat in February on a month-over-month basis; expectations were for a 0.1% increase. Excluding food and energy, CPI rose by 0.1%, exactly as expected. The data confirm that inflation is not yet an issue and that the Fed is under little pressure to normalize policy sooner rather than later. Weekly jobless claims fell to 457,000 from 462,000, in line with forecasts. America's fourth-quarter current account deficit, the broadest measure of trade in goods and services, rose from a revised $102 billion to $115 billion, less than expectations for $119 billion. The greenback was mostly unchanged on the news. GBP: Net borrowing by the British government rose to 12.36 billion pounds last month, which was less than the 14.75 billion pounds but was still the highest read for any February on record. The better-than-forecast reading of public sector borrowing added to the generally improved tone for the pound this week, helping to push it to five-week highs against the greenback and euro. Separate data from the Confederation of British Industry (CBI) showed a steeper-than-expected drop in factory orders in March but a mild rebound in demand from abroad. Although the pound has recovered from recent lows across the board, is upside should remain limited by the soft pace of the U.K.'s recovery and from mounting uncertainty ahead of a general election expected some time around the middle of 2010. CAD: Firmer commodity prices, an outlook for continued easy monetary policy from global central banks and a generally improved environment for risk appetite pushed the Canadian dollar to multiyear highs against many of its major rivals. Canada's exposure to recovering U.S. demand and Ottawa's relatively healthy fiscal balance sheet have added to the loonie's broadly improved tone. The currency should remain well-supported in the months ahead, but it could run into resistance if monetary officials ramp up rhetoric about the detrimental impact of currency appreciation.
The Canadian dollar could also become vulnerable if China moves to slow its economy through additional credit or monetary tightening.