The Dollar strengthened against most currencies on Monday closing at 1.3190 to the Euro. The Economic data for the day was either as expected or slightly better with Construction spending up and the ISM index which measures growth in the manufacturing sector above analyst’s expectations but still showing contraction rather than expansion overall – just a slower rate of contraction. Nevertheless, the Greenback was buoyed up by these figures and positive news from equities where a merger between United Air and Continental created the world’s largest airline. There was a flight from the Euro as scepticism set in again surrounding the measures being brought in to support Greece and the ability of the Euro zone to survive if other member states require similar amounts of aid in the future.

   The Euro weakened against most currencies during Monday’s trading closing at 1.3190 to the Dollar and 0.8652 to the Pound. Despite news of a 110 billion euro joint EU-IMF aid programme for Greece the markets remained jittery and the Euro experienced a sharp sell-off, bringing the single currency back to near its April lows. Scepticism concerning the ability of Greece to make the necessary cuts required to meet the conditions of the loan and a fear that there will be dwindling resources for other member states who may require aid in the future both helped push the Euro lower. Social unrest peaked in Athens over the weekend in response to planned austerity measures and there are now concerns over whether they would be workable in practice.

   The Pound lost ground against the Dollar but posted gains against the Euro ending the day at 1.5244 to the Dollar. The Bank Holiday in the UK must have had a diluting effect on trade and the Pound is still range bound as investors await news of the results of the general election on Thursday. Despite recent gains in the polls by the Conservatives they have been insufficient to dispel the likelihood of a hung parliament. A coalition government has been interpreted by the markets as a weak alternative without the necessary consensus to push through the difficult spending cuts required to curb the UK’s huge deficit.

   Japan had a bank holiday on Monday and so trading in the Yen pairs was thin. The Yen closed down against the Dollar at 94.526. A slight improvement in risk appetite, as a result of the emergence of concrete measures to help Greece, was seen as one possible reason. News that the Chinese government had raised it Bank Reserve Ratio by 50 basis points for the third time this year also contributed, as it reduced the likelihood of an imminent Yuan revaluation, and the probable fiscal tightening that would result.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst