The Dollar traded higher against most currencies on Tuesday ending the day at 1.2988 to the Euro and 1.5141 to the Pound. Dollar strength was explained as a tactical flight from risk and because of better than expected economic data and corporate profits. Pending Home Sales showed an increase of 5.3% in April and March Factory Orders were higher than expected. Whilst the Home Sales figures could partly be explained by people buying ahead of the expiration of the Home Buyer’s Tax Credit, the news taken as a whole was seen as further evidence that a US recovery is underway.

   The Euro had a terrible day making new annual lows of 1.2988 against the Dollar and 0.8575 against Sterling. The 110 billion euro EU-IMF aid package to Greece unveiled at the weekend caused more concern than comfort as investors doubted the practicability of some of the austerity conditions given the political reaction so far. There were further riots in Athens and protesters overran the Acropolis as opposition to the measures grew in popularity, with many investors fearing they will be unworkable in practice. The Euro was further damaged by fresh fears of contagion as the cost of financing debt in Portugal and Spain rose dramatically making it even more expensive for peripheral EU members to borrow.

   The Pound had a mixed day ending down against the Dollar at 1.5141 and up against the Euro. Mixed economic news and continuing uncertainty over whether there will be a hung parliament both contributed. Whilst there was good news for manufacturing with April PMI up higher than expected, consumer credit fell as did mortgage lending. The reduction in borrowing was interpreted as a sign of weakness for the economy which is still struggling to gain upward momentum.

   The Yen edged higher to end the day at 94.537 against the Dollar on Tuesday. Gains were supported by safe haven demand after China released some negative manufacturing data. Gains, however, were offset by concerns raised by the S&P over Japan’s sovereign debt rating. But overall it will be a quiet few days for the Yen as it is Golden Week in Japan, a national holiday.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst