Dollar tumbles as Portugal requests bailout; equities flat, commodities higher

Tom Tong11/Apr/2011Currency Updates

Financial markets ignored a raft of unsettling news last week: another 7-plus earthquake in Japan; higher oil prices on continuing Middle East conflict; and a new bailout of a European sovereign, followed by the first ECB hikes. The resilience of equity markets in the face of these shocks is as remarkable as the failure of the US dollar to rally on this negative news.


Sterling put in a remarkably strong performance last week. There was no change to the Bank of England rate nor the size of the purchase target. Disappointing news regarding February manufacturing production (flat on the month, vs. expectations of a 0.4% increase) was moreover less balanced out by a much stronger than expected services business sentiment release. The currency strongly outperformed not only the USD but the EUR as well earlier on the week, buoyed by the PMI services release. However, after the manufacturing numbers were released, it lost its gains vs. the common currency while still ending the week up over 1.5% against the dollar.


The remarkable run of the euro continues, as investors and traders ignore all negative news and choose to focus only on the widening interest rate differentials between the Eurozone and the US. Portugal became the third country in the Eurozone to request a bailout from the IMF and the EMU; the news had bee widely anticipated, since Portuguese bond yields had soared into the double digits in the preceding days, effectively closing Portuguese access to market financing. Spanish and European officials quickly denied any possibility that Spain may be next; we cannot help but noticed that the exact same denials had been issued by Ireland and Portugal after the Greek bailout. For now, however, markets seem to believe that the problem has been ring-fenced and Spanish spreads actually came in somewhat on the news. The expected ECB hike buoyed the common currency, as the euro rallied sharply to nearly 1.45 against the USD.


Amid a dearth of macroeconomic news, the USD spent the week steadily selling off as Fed officials were on balance more dovish than the previous week, and rate differentials between the USD and other G10 countries generally widened. The sell off gather speed later in the week, as the trade-weighted USD broke cleanly through the lows of early 2008. However, the more widely followed, but perhaps less economically meaningful DXY dollar index is still safety above the 2008 lows. However, with speculative short positioning against the greenback at very stretched levels, some commentators are calling for at least a temporary bounce in the dollar.

Other G10

As the earthquake and the Fukushima reactor slowly recede from the headlines, the old negative correlation between JPY and US rates reasserted itself strongly last week. The yen sold off initially, as rates in the US rose, but as expectations for Fed hikes were pushed back into the future later in the week, the Japanese currency rallied again, to end the week down slightly against the greenback.

All three dollar block currencies marched higher against the dollar last week, in tandem with commodity prices worldwide. The new Zealand dollar was the outperfomer, driven mostly by the stretch short positioning in the market in the absence of market moving news. The Australian dollar was not far behind, driven on not only by commodity prices but also by a very strong jobs report for the month of March that has put further RBA hikes back on the table. Finally, the Canadian dollar lagged somewhat, but still managed to end the week up about 0.7% against the USD.

Scandinavian currencies moved in a very tight range against the euro and each other last week. Industrial production was the only news of note last week, with a strong positive surprise in Sweden and a mildly disappointing number in Norway. The FX market barely responded to this information, as both currencies ended the week nearly unchanged against the common currency.

The good tone in risk assets, as well as the lack of panic in response to the Portuguese bailout, took its toll on the Swiss franc, which saw the safe-have bid fade somewhat and ended the week down against the euro.


Written by Tom Tong

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