All bad news for USD

The dollar continued weakening against the euro yesterday. During a half hour in the afternoon sever

(13.04.2011) The dollar continued weakening against the euro yesterday. During a half hour in the afternoon several small, but negative news for the US currency, poured in. Even today there are some events that can cause FX rate fluctuations, including a speech from Obama on his vision to reduce the long-term US budget deficit and statements from different Central Bank members.

By Maren Romstad, Analyst at DNB Markets

In currency markets yesterday the dollar continued to weaken against the euro. It started early in the morning with a strengthening of the euro, after the ZEW index was published. The German index, which measures the sentiment among financial analysts and institutional investors, was better than expected for the current situation. This indicates a high degree of optimism and the overall index is near its highest listing. The future index fell sharply, but the majority of those responding still expect that conditions will improve in the future.

In the afternoon the upward tendency in the EURUSD exchange rate accelerated, and the currency cross traded above 1.45 for the first time since January 2010. Weaker-than-expected international trade figures from the US may have been a contributing factor, but this was far from the only factor that pointed in that direction.

Within half an hour yesterday afternoon the following news were published
: First, Portugal's Finance Minister announced that the country’s funding needs are covered in the next two months. However, the euro has not been particularly affected by the situation in Portugal the last couple of weeks, but yesterday's reassurance was not likely to be negative for the euro.

Then conflicting messages from two central bank members on a visit to Hong Kong were released. Fed’s Dudley said that the US economy is far from the target for employment growth and that first quarter growth is expected to be weak. In the same forum a member of the European Central Bank continued the more hawkish tone. ECB's Stark is expecting that growth in first quarter will be stronger than expected. He also pointed out that last week's interest rate increase was a step towards a normalization of monetary policy.

Given the market's focus on interest rate differences and monetary policy recently, it’s not surprising that two such contradictory messages lead to a movement in the respective currency cross. All this within half an hour and if we take into account that the trend is clearly towards a higher EURUSD, it is no wonder that such a series of news resulted in a relatively large movement in the currency rate.

Even today there are several events that may affect the dollar. Some macro figures may give market impact, but perhaps most important is tonight's speech from President Obama on his vision to reduce the long-term US budget deficit. Last week financial markets were worried about whether the US government would come to an agreement on the budget and thereby prevent a public sector shut-dwon. This was prevented at the eleventh hour and the Republicans and Democrats agreed on cuts of 38.5 billion dollars. Although they agreed on the framework for the fiscal year 2011 several details are still very unclear.

In addition, there are also a number of speeches by various Central Bank members today, including ECB's Weber and Fed’s Bullard (both hawkish).

The euro also strengthened against Pound sterling yesterday, which mainly was due to the pound weakened after inflation slowed in March. Annual price growth fell from 4.4 per cent in February to 4.0 per cent in March. This was the first month with declining inflation since July last year, which was due to a fall in food prices. The inflation rate is still high above Bank of England’s inflation target, but many of the inflationary impulses are expected to be temporary. High inflation is largely caused by VAT increases, the effects of a weak pound, and high food and energy prices.

Elsewhere in the financial markets yesterday equity prices dropped world wide. The decline on US stock indices was due to a weak start on the earnings season for the first quarter. Furthermore, the krone has appreciated on a broad basis, and this despite the fall in oil prices and that general risk appetite seems lower. The latter may also explain why the Swiss currency has appreciated, as the franc is often is viewed as a safe haven in FX markets.