Dollar appears to stabilize as prospects for risk assets cloud further
18/Apr/2011 • Currency Updates•
Headwinds continue to build against the extraordinary bull market in risky assets that has been underway since the 2009 bottom. Last week, bad trade numbers forced economists to significantly downgrade expectations for first-quarter economic growth in the US. Oil prices stayed high, as there are no signs of a quick resolution to the civil war in Libya. Insistent rumours of a Greek debt restructuring are beginning to make a mockery of EU official denials. Finally, Spanish and Italian spreads appear to be re-coupling to the weaker peripheral sovereign credits. Given the pile up of bad news, it’s a testament to the strength of this bull market that equities worldwide generally dropped 1% or less for the week. The euro managed to close only slightly down against the dollar, in spite of the worrisome price action in Spanish and Italian bonds, and the US dollar traded flat to lower earlier in the week before recovering most of its losses on Friday.
For the first time in many months there was some relatively good news on the inflation front. YoY inflation actually dropped, from 4.4% to 4.0%, vs. expectations of 4.4%. The moderation was widespread, and this brought hopes that Mervyn King’s dovish views on inflation and rates will be vindicated. Expectations of BoE hikes were pushed into the future. Sterling, however, dropped less than may have been expected, as rates were repriced downwards in other G10 economies as well and therefore rate differentials did not move much. GBP ended the week flat against the common currency and down 0.5% against the dollar.
Peripheral woes returned to the headlines last week. Insistent rumours over a restructuring of Greek government debt appear to indicate that EU and Greek officials are finally bowing to the reality that Greek debt levels are simply not sustainable, particularly given the dismal effect on economic growth that the EU-imposed austerity measures appear to be having. More worrisome is the fact that Spanish and Italian spreads appeared to recouple to the weaker sovereigns, as investors sold those bonds relentlessly, starting Wednesday afternoon. Given this negative backdrop, it is surprising that the euro managed to end the week essentially unchanged against the greenback.
Last week’s backdrop should have been positive for the dollar. However, the unanimous downgrade of US first-quarter growth prospects after a weak trade report for March, together with the lack of a definitive resolution of the US budget impasse, managed to trump the flight-to-safety bid for the dollar, which ended the week more or less unchanged in trade-weighted terms.