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Dollar, Yen to Extend Gains as Europe Outlook Stokes Risk Aversion

Dollar, Yen to Extend Gains as Europe Outlook Stokes Risk Aversion

2010-05-17 04:26:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• Dollar, Yen Rise as Stocks Drop on Europe Economic Growth Fears
• UK House Prices to Rise Least in Four Months, Says Rightmove

Critical Levels

05172010 1

The Euro dropped to a four-year low while the British Pound slid to levels unseen since March 2009 against the US Dollar as greenback capitalized on intense risk aversion in Asian trade (see below). We remain short EURUSD at 1.4881.

Asia Session Highlights

05172010 2

The US Dollar and the Japanese Yen surged sharply higher against the spectrum of major currencies – the former boosted by safe-haven demand and the latter by unwinding carry trades – as stocks collapsed in Asian trade amid concerns that Europe’s debt-reduction efforts will undermine the global economic recovery. Indeed, bailing out high-deficit countries would imply taking on substantially more debt for bastions of fiscal discipline like Germany; financing this will drive borrowing costs higher, slowing economic growth. Taken together, the Euro Zone is the world’s second largest economy, so a marked downturn here bodes ill for the global recovery at large. The MSCI Asia Pacific regional equity benchmark index fell 3 percent, the most since November 2009.

UK House Prices will rise 4.3 percent in the year to May – the smallest annualized increase in four months – according to a report from Rightmove Plc, an online listing of for-sale properties. Rightmove commercial director Miles Shipside said “rising levels of unsold stock” are pushing sellers to “reduce their pricing expectations” to court a shrinking number of willing buyers.

Euro Session: What to Expect

05172010 3

The economic calendar is conspicuously uneventful in European hours, leaving risk sentiment to remain as the primary driver of price action. US stock index futures are trading sharply lower, down 1.2 percent ahead of the opening bell in Europe and hinting that continued risk aversion will see the US Dollar and the Japanese Yen continue to advance against the spectrum of major currencies.


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