The slide in the dollar continues and some market watchers are starting to wonder whether this might not constitute a reversal. After all, the dollar was being used as a refuge not because of any intrinsic value but because it was the best of a bad bunch. Whilst a big drop is unlikely particularly given the state of Europe, a rare tinge of weakness could slow further gains indeterminately. Data released by the Commodity Futures Trading Commission shows the aggregate long, or positive, bet on the dollar was the biggest on record last week and just as some believe there's no-one left to sell the euro, it could be that there's no-one left to buy the dollar. On the US economic news front the subject of unemployment keeps raising its ugly head. The New York Federal Reserve Bank's Empire State survey reported that its employment index--although still positive--weakened in June from May and The National Federation of Independent Business reported small-business owners across the U.S. are not adding workers because of weak sales. Finally there is the emotive debate in congress about the extension of benefits to the long term unemployed. It starts to looks like unemployment could be the particularly sharp thorn in this US recovery’s side. The Dollar fell during Tuesday’s trading by 0.5% to ¥91.18 against the Yen, and 0.8% to SFr 1.1334 against the Swiss Franc.

   The Euro recovered from early losses on Tuesday after Spain and Ireland finally managed to raise funds in the international debt markets, temporarily easing concerns there might be a credit squeeze in the Euro zone periphery. The question now has to be – can this rally last? So far it has flown in the face of some pretty bad news and the yields of government bonds tied to some fiscally stressed countries have continued to tick higher. But then some say not all is doom and gloom either, figures from the European Union's Eurostat statistics office showed employment stabilized in the first quarter following six consecutive quarterly declines, and the 16-nation currency bloc posted another global trade surplus in April. Detractors say, however, that Euro zone growth data is ‘skewed ’ by the positive performance of a few successful economies such as Germany and nordic countries and are not reflective of what is happening to all. The sharp slump in investor confidence in the last ZEW survey showed that investors are concerned about the longer term outlook as countries implement austerity measures across the board. They also point to problems in larger economies such as Spain where large corporations have found it almost impossible to borrow on the international money markets recently relying almost solely on money from the ECB. If Spain were to fail it would have a much larger effect compared to Greece. The exposure of European banks to total Spanish debt is more than €700bn compared to around €200bn for Greece. The euro’s rebound has been timid compared to other countries as Euro-zone gross domestic product grew just 0.2% on a quarterly basis in the first three months of the year, after expanding 0.1% in the final three months of 2009. With the price up; news down paradox persisting some commentators are skeptical about the rally: “someone is wrong,” as one analyst put it in a recent interview, adding as a final remark – “The euro rally is too soon.”

   The Pound lost ground on Tuesday as figures showed that UK consumer price inflation rose 3.4% in May, down from 3.7% in April and lower than consensus forecasts for a 3.5% rise. The data eased concerns that the Bank of England might have to exit from its ultra-loose monetary stance sooner than expected to fight rising price pressure in the economy. The data helped reinforce the BOE’s argument that the recent upswing in prices owes to temporary factors, with current policy sufficient to bring inflation back toward the 2 percent target level over the medium term allowing the central bank the flexibility to retain stimulus for a longer period. This is important given the growth rate of government spending has regularly outpaced that of private consumption since the first quarter of 2008, so any retrenchment on the fiscal side is likely to bring a slowdown in GDP expansion. This hints the BOE will need to press forward with an accommodative posture longer than most monetary authorities, an outcome however, that surely bodes ill for the UK currency. The pound gained 0.5 per cent to $1.4807 against the dollar but fell against the Euro to £0.8302.

   The Yen bounced back temporarily but pared gains as the session continued and risk appetite stayed buoyant. Japan's policy board decided to make Y3 trillion available to private banks at 0.1% to lend to companies, encouraging firms to make long-term business investment, combating deflation and strengthening the nation's economic foundation. The BOJ also voted unanimously to maintain policy interest-rates at the target 0.1%. The Yen rose against the Dollar at ¥91.45 but weakened against the Euro to ¥112.77.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst