The Dollar gained against the Euro during Tuesday’s session closing at 1.2346 and rose against Sterling ending the day at 1.4414. Initially demand for the Dollar was strong as equity markets around the world fell heavily on continued Euro zone debt fears and the threat of conflict between North and South Korea. The S&P opened 26 points lower but made a come back in the afternoon. Dollars and Treasury Bonds – viewed by many as ‘safe’ - have never been so attractive as both economic, financial and now geo-political concerns weigh heavily.

   The Euro fell back to its old lows at the beginning of Tuesday’s session but fought back later in the day. It closed at 1.2346 against the Dollar and 111.38 against the Yen. Initially the markets sold off at the prospect of a European banking crisis with the news that four Spanish savings banks had approached the Bank of Spain to ask them to facilitate a merger to help consolidate their debts. This came after the recent news of the bailout of struggling regional bank Cajasur. Once again the Euro zone was seen as a hot potato. The decline steadied, however, after economic figures showed industrial orders rose much higher than expected and had risen at their fastest rate for nearly 3 years. The inference was that the weakening Euro was beginning to have a positive effect on exports. Strong Italian retail figures also helped the bounce back and the only negative data was for consumer sentiment. The markets may also have gained some confidence from the meeting in Brussels of Europe’s leading heads of finance to discuss austerity measures and Italy’s announcement to cut 24bn from its budget deficit.

   The Pound closed down slightly against the Dollar at 1.4406 but up against the Euro at 0.8566. The Pound fell as it tracked the Euro lower amidst concerns about the European banking sector after Spain’s bailout of regional lender Cajasur yesterday. The news pushed up interbank funding rates and fanned Dollar demand. Sterling was already under pressure from concerns that the fiscal tightening proposed by the new government may harm its recovery. It was only in the afternoon that the Pound managed to make a countertrend rally on the back of positive GDP figures which showed Q1 GDP slightly higher than estimates.

   The Yen started strong amidst renewed European debt concerns and large losses in equity markets but as equities rallied into the close gave up most of its gains to end the day near where it started. The Yen closed marginally up against the Pound at 129.97 and up against the Euro at 111.38.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst