FOREX: US Dollar May Extend Losses as Risk Appetite Recovers

Talking Points

• US Dollar Selling May Resume as S&P Futures Hint at Risk-On Mood
• Euro, Stocks-Linked Currencies May Rise on German 4Q GDP Revisions
• Yen Slumps on Bargain-Hunting After Yesterday’s USDJPY Drawdown

The US Dollar (ticker: USDollar) was little changed against most of the major currencies overnight, with prices consolidating after the greenback suffered its largest drawdown in a month. Looking ahead, S&P 500 stock index futures are pushing higher ahead of the opening bell in Europe, hinting a chipper mood is likely to trim safety demand and renew selling pressure on the go-to haven currency.

On the data front, the spotlight turns to the revised set of fourth-quarter German Gross Domestic Product figures. Expectations suggest the data will confirm the top economy in the Eurozone shrank 0.2 percent in the three months through December. Traders will be particularly interested in the component breakdown of the report to update their outlook for region. Eurozone economic data releases have broadly outperformed relative to expectations since mid-January, opening the door for upside surprises in today’s report.

Such an outcome is likely to prove supportive for the Euro, which has increasingly focused on the interest rates outlook after a second Greek bailout agreement was finally unveiled earlier this week. They may likewise offer a boost to overall risk appetite (and stocks-correlated currencies) if the results prove strong-enough to downgrade Euro-area slowdown fears.Economists’ forecasts suggest the currency bloc will be the leading drag on global economic growth in 2012, with median forecasts pointing to a 0.5 percent contraction. Updated projections from the EU Commission released yesterday likewise foresaw recession, albeit a milder one where output fell 0.3 percent.

The Japanese Yen broadly underperformed in Asia, sliding as much as 0.5 percent against its top counterparts. The move may have been driver by bargain-hunters after benchmark USDJPY exchange rate fell 0.4 percent over the preceding 24 hours, marking the largest daily loss in nearly four weeks. That move was likely linked to a drop in US Treasury yields – an important driver of Yen price action – after an auction of 7-year notes drew stronger-than-average demand. The Treasury sold $29 billion in debt with a bid-to-cover ratio of 3.11 compared with an average of 2.81 for the preceding ten auctions.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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