Dollar Testing 74.45: The Dollar Index was able to hold the 74.20 level and is now pushing back to test the 74.40 level as safe-haven buying provides support. The euro continues to be the primary driver in the currency markets and with that getting hit today the DXY has been able to post a modest gain. However, it has been unable to break above the 74.45 level which is setting up as an important resistance area intraday. One small side note, a German ratings agency downgraded the U.S. dollar to AA from AAA, becoming the first Western agency to do so. This should not impact the dollar but it is worth noting the growing unease on the American debt situation.
The euro has tumbled lower despite reports that Germany's parliament has agreed on a structure that would allow for the second round of Greek bailouts. It appears that the bailout would allow for a rollover of Greek debt without triggering a 'credit event'. Certainly plenty of reasons behind the drop despite the positive news. First, the size of the deal is now being rumored to be in the neighborhood EUR 120 bln (IMF/EU/ECB EUR 60 bln, EUR 30 bln asset sales, and EUR 30 bln from the private sector). In addition, German CPI was flat m/m which takes away some of the uncertainty of a July rate hike by the ECB. Offsetting this to a certain degree is the Bundesbank which raised its growth outlook for 2011-12. Adding to the stress in the euro is markets digesting an auction by Spanish banking giant Santander (STD) two days ago that failed to raise the EUR 1.5 bln it had hoped.
The pound has been chopped down to the 1.6220 area as another round of poor economic data pushes out rate-hike expectations. The latest was a weak Manufacturing and Industrial Production number and a lower-than-expected PPI. This provides further credence to the dovish expectations that inflation concerns would cede in 2H11 as economic growth cooled.
The yen continues to have trouble breaking through the 80 level as the looming specter of government intervention is keeping safe-haven players away from the currency.
