The main correlation with the Dollar now is fear and on Tuesday in stark contrast to many other days recently the markets remained relatively calm and so the Dollar in turn took a small hit. Federal Reserve Chairman Ben Bernanke offered comforting words in Washington saying he didn’t think the US was falling back into recession. The Dow promptly rallied out of new lows; demand for treasuries fell and demand for the Dollar fell too. Investors may have also been cheered by signs of competence in Europe as the stabilization fund was signed off and Angela Merkel announced 80bn of cuts to control its deficit. Whilst this was unlikely to woo investors back to the shattered Euro it probably did lead to some short covering which produced a small up day. The Greenback sank to $1.1972 against the Euro and ¥91.45 against the Yen.

   Could it be Estonia in – Greece out? The two stood in stark contrast yesterday as EU finance ministers met in Brussels to agree the final details of the EU stabilization fund and vote the little Baltic state into the Euro. Estonia has shown model discipline in its recovery from the recent recession and has now passed the required tests to join the common currency. Elsewhere, German economic data showed a slowing of trade but an increase in industrial output and Angela Merkel announced 80bn worth of cuts to bring discipline to Germany’s books. All in all it was an unusually optimistic day on the European front and this may have encouraged a short covering rally; but days like these are the exception rather than the rule and may simply constitute moments of calm in the storm. The Euro closed up against the Dollar at $1.1972 and up against the Pound at £0.8273.

   Sterling had a mixed day after comments by rating agency Fitch sparked concerns about the UK economy and saw the FTSE and the Pound tumble at the open. The UK has managed to hang onto its AAA rating despite one of the highest deficits in Europe and continued high borrowing but if the situation persists and some heavy cutting isn’t implemented then it may be downgraded warned the rating agency. Nevertheless Gilts are still seen as a less risky alternative to Eurobonds and the UK benefits from some of the longest repayment lags around with some of its debt not maturing for at least 14 years. The Pound recovered during the rest of the session rallying back up and closing marginally up against the Dollar at $1.4469 but down against the Euro at £0.8273.

   The Yen weakened against most currencies as equity markets in Asia picked up and investor risk appetite returned. Bottom pickers were out in force as the general consensus was that some stocks had reached oversold levels in the recent sweeping sell-offs and now presented good value. The Yen as much as the Dollar is tethered to panic, fear and risk aversion and today was a calmer day as slightly more confident investors decided to go out shopping for ‘deals’. The new finance minister, Yoshihiko Noda, who is viewed as a disciplinarian, gave a non-committal, conservative press conference in which investors found little to hook onto and stoke up any sentiment with, remarking simply that he would be keeping a close eye on the markets and ensuring volatility did not unduly undermine Japan’s exports. The comments sounded sensible and innocuous – maybe a joint delegation from Europe led by French and Hungarian government officials should visit Tokyo for advice on how to handle the press! The Yen closed down as risk appetite returned, closing down against the Dollar at ¥91.45 and down against the Euro at ¥109.49.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst