The dollar extended its recovery after the Dollar Index found technical support at the 83.60 level and fresh fears in Europe increased safe haven demand. There was no data released for the US but mounting fears about how European banks will fare in the stress tests on Friday and also about the outcome of euro zone periphery bond auctions later this week both weighed on the euro and favoured the dollar. The greenback was up against the euro at $1.2596 and ended the session at $1.5030 against the pound.

   The euro was down on Monday as investors fears increased about the results of the banking stress tests on Friday. The euro was further hit by negative reports in the German press reporting the government favoured an “orderly insolvency” of indebted euro zone countries, with bond holders “giving up a part of their claims.” Data from the Chicago Mercantile Exchange showed investors closed half their short positions in the currency during the recent bullish rally. This shows a waning in bearish sentiment. However, given the extreme levels of shorting reached during the recent fall this may just be a rebalancing act rather than a change in sentiment and could even offer some spare capacity for more shorting. Read in a contrarian fashion: if anything the lowering of the excessive number of bets against the euro could be a sign a bout of fresh shorting may be about to begin. Finally news this morning that Moody’s have downgrade Portuguese debt further to an A1 rating have pushed the Euro down even further. The outlook looks rocky for the single currency over the coming weeks. The euro ended the day down against the dollar at $1.2596 and down to ¥111.60 against the yen.

   The pound fell on Monday after poor economic data showed a widening gap in the trade deficit and weakening house prices. GBP Current Account fell from £0.5Bn in the preceding quarter to £-9.6bn for the most recent quarter. Meanwhile the RICS Housing Index fell from 21% to 9%. The pound was also hit by warnings from the S&P that reiterated how precariously close the UK economy was to losing it AAA rating. The S&P own growth forecasts were also below those of the Office for Budgetary Responsibility’s highlighting the fear many economists have that the private sector and consumer spending will make up the short fall created by the austerity cuts. The pound was down to ¥133.16 against the yen and $1.5030 against the dollar.

   The yen clawed back some of the losses caused by yesterday’s political uncertainty. In the election results on Monday the ruling Democratic party lost their majority in the upper house of the Japanese parliament. The government had proposed a good’s tax to help bring down the deficit but this proved unpopular with the electorate. Now there are concerns that there is a lack of political will to bring down the bulging budget deficit and reduce debt generally which is now almost double GDP. Nevertheless the yen continues to outperform all the other major currencies amidst a renewed bout of risk aversion. The recent falls in US treasury yields – to new lows – have made the yen even more attractive vis-á-vis the dollar. The yen closed up against the euro at ¥111.60 and up to ¥133.16 against the pound.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst