FOREX: US Dollar to Extend Gains as Market Confidence Evaporates

Talking Points

• US Dollar Soars on Safety Demand as Stocks Slump Overnight
• S&P 500 Index Futures Point to More Risk Aversion in Europe
• Chinese Inflation Soars, Stokes Stepped-up Tightening Fears
• EU Debt Crisis Threatens Italy Amid Struggle Over Budget Plan

The US Dollar pushed aggressively higher overnight, bolstered by safe-haven demand as stocks slumped after a disappointing US jobs report was compounded by deepening crisis in the Euro Zone and fears of accelerated slowdown in China. S&P 500 stock index futures – a proxy for broad-based sentiment trends – are trading sharply lower ahead of the opening bell in Europe, pointing to more of the same in the coming session.

In the Euro Zone, debt crisis contagion fears are growing as political infighting between Italian Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti threaten to derail the passage of a 40-billion euro deficit-reduction plan. Italy is the third-largest economy in the currency bloc, making it almost certainly beyond the scope of a rescue through the existing EFSF bailout fund. EU President Herman Van Rompuy has called for anemergency meeting of key policymakers for today to address the deepening malaise.

Meanwhile, China reported that inflation accelerated to an annual pace of 6.4 percent in June from 5.5 percent in May. The outcome marked the largest monthly increase in 16 months as well as the highest headline reading since June 2008, spawning fears that Beijing will step up efforts to cool the buoyant economy. Investors have been on edge about the prospect of a global slowdown in the second half of the year for a couple of weeks already following disappointing set of PMI readings from across the world’s leading growth engines, and the prospect of further policy-induced slowdown in the globe’s second-largest economy has now compounded those worries.

Needless to say, bad news from Europe and the Asian giant surfaced at the worst possible time, with investors still reeling from last week’s disappointing US employment figures. The aforementioned slump in PMI readings was not mirrored in the US and hopes were running highthat the world’s largest economy was finding its feet and would carry the global recovery onward even as performance stumbled elsewhere. Clearly, those hopes have now been tarnished, adding to overall selling pressure.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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