FOREX: Dollar Losses Ground as Stocks Rise Ahead of US GDP Revision

Overnight Headlines

• US Dollar Slumps as Greece Fears Wane, US GDP Revision Approaches
• Euro Outperforms British Pound as Risk-Linked Currencies Hold Sway

Critical Levels

The Euro pressed higher, adding as much as 0.7 percent against the US Dollar as the greenback traded broadly lower overnight (see below). The British Pound underperformed, adding a mere 0.2 percent against the greenback. We remain long USDJPY and continue to look for EURUSD selling opportunities.

Asia Session: What Happened

The US Dollar came under intense selling pressure in overnight trade, down as much 0.6 percent on average against its top counterparts, as stocks raced higher across Asian bourses to sap safe-haven demand for the benchmark unit. The New Zealand Dollar outperformed among the stocks-correlated currencies, rising as much as 1.3 percent ahead of the opening bell in Europe.

The MSCI Asia Pacific regional stock index rose 1.4 percent, the most in over a month. The surge in optimism came as the Greek government assured markets it will remain within the Euro area and ruled out early elections while also expressing confidence that it will receive the fifth portion of its EU-IMF loan. Separate reports from the OECD and Fitch also helped; the former said Greece will return to sustainable growth in 2012 while the latter argued German banks’ exposure to Greek sovereign debt is “manageable”, alleviating fears that credit stress in the Mediterranean country could derail the region’s top economy.

Euro Session: What to Expect

The economic calendar offers no meaningful European event risk, putting the spotlight on revised first-quarter US Gross Domestic Product figures due in the second half of the session. Expectations call for the headline quarterly growth reading to be nudged higher to 2.2 percent from the originally reported 1.8 percent result. Risk appetite seems to be treating the adjustment as a positive development despite its implications for the Fed rate hike outlook, with S&P 500 stock index futures firmly in positive territory overnight.

On balance – barring a downside data surprise – this points the way higher for the spectrum of sentiment-sensitive currencies at the expense of the US Dollarin the day ahead. One possible standout is the greenback’s pairing against the Japanese Yen: risk aversion noted in the first half of the week was a boon for US Treasury bonds – the stand-by safe haven asset – which has kept yields on the defensive. Surging risk appetite promises to send capital out of Treasuries and back into shares however, boosting yields and driving USDJPY higher given its correlation with the 10-year rates spread.

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