The dollar traded mixed on Thursday, falling in the overnight session, but then recovering after risk appetite deteriorated following renewed euro-zone debt concerns. The continued impasse in Greek debt-swap talks weighed as did reports that Greece would need a further 15bn on top of what was already agreed. Fed Chairman Bernanke's testimony to congress resulted in a rise in the dollar as economy showed signs of recovery with “monetary union” amidst “fiscal disunion”. Saw problems mainly as 'fiscal'. Bernanke, however, was not overly optimistic and testimony probably won't help dollar as he still saw U.S economy vulnerable to “shocks” and employment situation as still a problem, with Consumer's facing major headwinds and Housing still blighted. On the data front U.S Challenger Job Cuts rose to 38.7% YoY in January vs 30.6% previous; RBC Consumer Index Outlook meanwhile fell to 45.1 vs 45.8 previous; U.S Initial Jobless Claims fell to 367k vs 375k expected and 379k previous; Continuing Claims gave 3437k print versus 3535k expected and 3567k previous; Non-Farm Productivity fell to 0.7% versus 0.8% expected and 1.9% previous; Unit Labour Costs rose 1.2% versus 0.8% expected and 1.9% previous.

   The euro fell after Greek debt-talks experienced a major set-back. Reports showed that although an agreement had been reached with private sector the IMF had expressed doubts as to whether it would be enough without the involvement of the public sector as well. This meant the ECB and Germany either lending more bailout money or taking haircuts on their holdings of Greek sovereign debt. Germany, however, was opposed to such a move unless Greece handed over control of its budget to the ECB. Given the loss of sovereignty which would result, however, it was highly unlikely the Greeks would agree to German demands – thus leading to the impasse and possible default. Earlier the euro had started the session stronger after comments from President Wen Jibao of China suggested China would help with the ESM bailout fund, although he added that Europe had to help itself first. On the data front Euro-zone Producer Prices came out as expected at 4.3% YoY in Jan – although MoM they showed a small drop of -0.2% versus the -0.1% expected.

   The pound weakened slightly on Thursday after a general fall in risk appetite following renewed euro-zone debt fears combined with poor data resulted in an end to the risk rally which had seen an an impressive 12 up-days out of the last 13 days. Yesterday's better-than-expected Manufacturing PMI, with its print above 50, indicating an expansion in activity, was not followed by an equally impressive January Construction PMI, which actually fell to 51.4 versus the 52.5 print expected and the 53.2 previous result. The pound was also weighed by a sudden escalation in Euro-zone debt fears after the head of the euro-group Jean-Claude Juncker was quoted as saying that negotiations in debt-swap talks with Greece were proving “very difficult”. The main problem seemed be be about the involvement of the public sector which the IMF had said was required now. This effectively meant the ECB and other euro-zone holders of Greek debt also taking a haircut. Germany opposed this idea unless the Greek budget could be managed by the ECB – thus effectively seeing the state hand over financial sovereignty to Europe; which would be politically highly unlikely to happen.

    The yen appreciated on Thursday after risk aversion increased following the continued impasse in Greek debt-swap negotiations and fears of a default in March when the country has to roll-over a substantial level of debt. The yen also rose against the dollar to levels very near to the record highs it reached before the October intervention. Finance Minister Yen Azumi was reported as saying that the government would use intervention to stop further speculation and volatility, and with the yen now close to the levels of the previous intervention this may become a factor shaping investor decision making as they scale back their yen holdings in anticipation of further state manipulation. Although news from equity markets has revealed massive losses for corporate Japan analysts are saying that compared to the rest of the developed world Japan Inc is holding up quite well, and this may weigh on the yen as the Nikkei looks set to recover or at least hold onto current levels. On the issue of the interest rate differential with the U.S supporting the yen, Thursday's Bernanke testimony seemed to have no noticeable effect as he kept the door open to further easing, and remained cautious about the recovery with a low interest rate likely for a a fairly protracted period thus continuing to advantage the yen from the carry perspective.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst