The Dollar continues to act as a barometer of fear and panic. On Monday it went up as the Dow fell to a new 18 month low and equity markets around the world sold off – caused in part by fears about the European debt problem. The economic data showed a positive increase in consumer credit to $1bn - a large increase compared to last month’s figure of -$5.4bn and higher then the -$1bn forecasted. Last week’s non-farm-payrolls had been an anti-climax overshadowed by Hungary’s problems. They showed that the US recovery story probably isn’t as rosy as some had thought. Ironically, from a currency point-of-view this weakness in fundamentals may have benefited the Dollar, as investors carry on investing in the Dollar to limit risk. The Greenback closed at $1.1913 to the Euro and F1.1640 to the Swiss Franc at the end of Monday’s session.

   The Euro stabilized after hitting new lows of 1.1875 on Monday. After the dust settled over the Hungarian debacle and the comments from the French Budget minister bringing into doubt the creditworthiness of mighty France, the Euro based out and began to rebuild from the ashes. Better than expected economic data from Germany showed that factory orders were up by 29% YoY - well above the 25% expected - and reassurances by the Hungarian government that they would get their house in order all helped foster a weak counter-trend recovery rally as the day progressed. The Euro closed down against the Dollar at $1.1913 and down against the Yen at ¥108.93 to the Euro.

   The Pound rose against most currencies after Prime Minister David Cameron gave a speech warning painful times lay ahead for ‘us all’. He has been busy preparing the public for the emergency budget which will be delivered on the 22nd of June. It is hoped this budget will secure over 6bn in savings from public sector cuts which can be used to pay off the deficit. Investors clearly liked all the talk of pain as Sterling rallied reaching highs of 1.4560. Some commentators, however, have questioned whether too much austerity might actually endanger the fragile recovery given the current turmoil in international markets. In the 1930’s the US government cut spending and this had the effect of prolonging the great depression. Examples where this approach has worked, however, include Canada and Sweden, both of whom made cuts in the 1990’s and successfully brought down their deficits, however, it has been pointed out these were made at a time of global economic growth, which must have helped, and in the case of Canada it’s closest neighbour the US was booming at the time, which is not the case now. At the close of Monday’s session Sterling closed up against the Dollar at $1.4467 and up against the Euro at £0.8241 to the Euro.

   The Yen strengthened against all major currencies as risk aversion once again set in and robust economic data was released. Japan’s current account balance was ¥1.262 trillion in April, slightly below estimates but  not by much. The Trade balance was also strong but slightly below estimates too at ¥859bn. Overall the figures show exports have remained strong despite the rapid appreciation in the Yen over the last quarter. This is important for an export led country like Japan. Bank lending, however, was still down adding to the deflationary trend. The Yen closed up against the Dollar at ¥91.36 and was up against the Euro at ¥108.93.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst