By Omer Esiner of TravelexThe U.S. dollar rose to a new three-week high against a basket of major currencies overnight, benefiting from the broad pullback in investors' risk appetite and from the steep drop in commodity prices. Uncertainty about the outlook for indebted Greece ahead of an EU summit this week kept the single currency under pressure and dampened demand for riskier assets like stocks and emerging market currencies. Conflicting messages about financial assistance for Greece from various European leaders highlighted the lack of cohesion within the bloc and kept sovereign credit concerns squarely in the spotlight. Lack of support for Greece from the EU this week could prompt Athens to turn to the IMF, a development that could initially send the euro broadly lower. A surprise interest rate hike by India's central bank on Friday raised concerns that monetary tightening in Asia's third-largest economy may cool a key engine of global economic growth going forward. Commodities like crude oil and gold tumbled and investors pared exposure to dollar-bloc currencies from Australia, New Zealand and Canada. Commodity currencies remain vulnerable to further signs that key regional economies like India and China are taking steps to cool their red-hot economies, which could undermine some of their recent demand for resources. No U.S. or Canadian data is due out this morning. USD: The U.S. dollar firmed to a three-week trade-weighted high amid a backdrop of softer risk appetite and continued concerns about sovereign credit risk. India's surprise interest rate hike late last week dampened some demand for riskier assets like stocks and commodities and raised concerns that cooler regional growth could weaken an important engine of global recovery. The dollar also drew continued support from uncertainty about the outlook for Greece ahead of this week's summit of EU leaders. While U.S. economic data has recently painted a mixed picture of recovery in the world's largest economy, it was still generally consistent with the view that America's rebound will outpace most of its major rivals. With many forecasting a very strong rebound in jobs growth in next week's non-farm payrolls report, the risk remains to the upside for greenback going forward.
EUR: The single currency suffered as uncertainty about the outlook for Greece kept investors wary of overexposure to EUR-denominated assets. Over the weekend, conflicting comments from European leaders highlighted the lack of unity in the bloc ahead of this week's EU summit. Germany, whose government faces a general election later this year, continues to oppose any direct aid to Greece. Italy and France have pledged support for Athens and warned that IMF assistance for Greece would undermine the ECB's authority. The lack of consensus has kept the overall level of uncertainty ahead of the meeting very high. Signs that EU leaders are moving closer to a Greek bailout would likely support the single currency over the near term. Still, its longer-term upside should remain severely limited by similar debt problems in other peripheral states and by the fact that fiscal tightening to bring deficits down will ultimately postpone any monetary tightening from the ECB. AUD: The Australian dollar fell to a two-week low against the greenback, but held near the upper end of recent ranges against most of its other major counterparts. The Aussie's allure was dented by a surprise 25-basis point interest rate hike by the Reserve Bank of India late last week. India and China have been regional and global engines of growth since the financial crisis, so any attempt by their respective central banks to slow expansion is seen as potentially choking off demand for commodities. While the AUD remains underpinned by expectations for additional policy tightening from the Reserve bank of Australia, it, along with its antipodean counterpart, the kiwi, remains vulnerable to further moves by China or India to slow growth. CAD: The Canadian dollar slipped to a one-week low against the greenback overnight but remained near the upper end of its ranges against its other major rivals. The steep drop in commodities like crude oil and gold dampened some of the market's recent demand for the CAD. However, its downside remains more limited than its commodity counterparts from Australia and New Zealand, given its relatively small exposure to India and China and its position to benefit more from recovering U.S. demand.