The dollar rose on Monday pushed up by safe haven demand and stable economic data showing a small increase in consumer expenditure. Worries about the euro zone’s financial system and global growth prospects lead to buying of US treasuries and the Swiss franc. This morning demand led the yield on the US 10-year Treasury to drop below 3%, while the yield on the 2-year note breached 0.6% - a record low. It is thought the dollar may rise longer term after the G20 meeting showed a divergence in economic policy from the austerity path chosen by Europe which it is thought will flatten growth and the stimulus-focused policy of the US. The dollar closed up on Monday at $1.2276 to the euro and was slightly up against the yen at ¥89.36.

   The euro fell, plagued by fresh debt fears after the news that a €442bn euro loan from the ECB is set to expire on Thursday. There are concerns about the ability of borrowers to repay the loans particularly Spanish banks who are demanding an extension to the credit line.The ECB’s one-year fixed rate tender will expire on July 1. The central bank will conduct a three-month tender to make funds available for those banks that cannot access new funding at more favourable rates in the market and the markets will closely be watching the extent of the take up of the three-month emergency provision. Investors will also be closely watching bond auctions in Spain and France later this week. Estimates say that at least €150bn of the ECB funding that is maturing will not be rolled over into shorter-term three-month schemes, forcing banks to shrink their own lending. The euro fell heavily at the suggestion of another crisis. The EUR/CHF pair also fell heavily after a Swiss National Bank official reasserted that the SNB had stopped intervening to stem gains in its currency against the euro. The Swiss franc rose to a record high of SFr1.3325 against the euro, before paring its gains to stand up 1.3% at SFr1.3349 by the US close. Elsewhere the Euro fell to ¥109.71 against the yen and £0.8126 against sterling.

   The markets showed confidence in sterling on a panic-filled day when fresh debt fears pushed down the euro. For once the pound was not brought down by a general flight from risk triggered by bad news from Europe. Whilst the euro slid amidst funding fears after the news of the imminent expiry of an ECB €442bn emergency loan, sterling held onto its gains with the EUR/GBP pair falling to £0.813. The broad acceptance of the UK’s emergency budget delivered last week is though to have contributed to sterling’s robust performance which has seen it breach key levels such as 1.50 against the dollar. Before the fiscal austerity adopted by the new coalition government there had been fears the Uk would lose its AAA credit rating. The pound gained against the dollar to reach $1.5105 and even rose against the yen to ¥134.95.

   The yen had a down-day, surprisingly, despite an increase in safe haven demand due to fresh fears stemming from Europe after the shocking news that it would be withdrawing a €442bn funding facility. It was thought investors flocked to the Swiss franc as yields on US treasuries hit record lows. The franc may become the currency of choice for safety now that the SNB has stopped manipulating its value to try to ease exports. Poor economic data showing an increase in unemployment and the exclusion of Japan from the G20 deficit measures because its deficit is too large to realistically cut by 50% show that there is no substance to the yen’s advance. Analysts believe, however, that these gains may gain over time as the global economy continues to falter. The widespread adoption of austerity measures has lowered growth forecasts in most parts of the world although some anticipate the dollar may strengthen even further against the euro as the two economies diverge. Hopes that China might have allowed the renminbi to rise, now that its fixed peg to the dollar has been released, have also been dashed. A stronger renminbi might have made exports from other major economies more competitive. The yen fell to ¥89.36 against the dollar and was down to ¥134.95 against the pound.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst