The Dollar lost some ground during Monday’s trading as US markets closed due to a national holiday and other currencies strengthened. There was a small recovery from the Euro as figures showed robust inflation and the Pound benefited from a fillip as data showed small increase in house prices. Generally there was a recovery of risk appetite following Friday’s sell off. The Dollar fell to 1.2285 against the Euro and 1.4518 against the Pound.

   The Euro managed to claw back some of the losses it suffered on Friday when Spain was downgraded from AAA to AA status by rating agency Fitch. Euro zone economic data was positive with a slight rise in inflation, showing perhaps that the credit squeeze following the debt crisis and austerity measures has not yet bitten. Business sentiment was either unchanged or down very slightly on the various surveys. Whilst some commentators have said the sovereign debt woes are beginning to spill over into the real economy there was no evidence of that from the data today - but then it may be too soon for it to be reflected. If European banks continue to struggle to borrow on the international markets then that might have quite a drastic effect although there is evidence the Euro has been overvalued for too long and exports are picking up as a result of its recent weakness. The Euro managed to rebound 0.2 per cent to 1.2285 against the Dollar and was up 0.3 per cent to 112.04 versus the Yen.

   Sterling strengthened on Monday despite a bank holiday in the UK. Housing data released at the weekend showed a continuation of the recovery in the housing market and traders discounted fears for the stability of the government despite the recent resignation of the Chief Secretary to Treasury David Laws over a confused expenses scandal. The pound climbed 0.6 per cent to 1.4518 versus the Dollar, rose by 0.2 per cent to 0.8489 against the Euro and by 1.1 per cent to 132.74 to the Yen.

   The Yen closed down against most currencies as risk appetite increased and fears over Japan’s huge deficit and continued deflation set in. Recent economic data showed a continuation of the deflationary trend with most inflation metrics down and a slight worsening of the employment situation. Japan’s 200billion deficit is equal to Greece’s and many ratings agencies are closely following how the country deals with its spiraling debt. Although exports remain buoyant, the worsening outlook for China, an important trade neighbour and the crisis in Europe are raising further fears about the future of important export markets. Nevertheless the Yen still retains a strong safe haven status. On Monday it closed down to 112.28 against the Euro and also down to 91.25 against the Dollar.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst