The U.S. dollar has seen little respite overnight; remaining under pressure despite a small relief rally following news that Citigroup said it would sell a $7.5 billion stake to the Abu Dhabi Investment Authority, providing funds to one of the banks hardest hit by the global credit crunch triggered in August by defaults on U.S. mortgages. Investors interpreted this move as a sign that financial institutions were repairing the damage from a meltdown in the U.S. sub prime mortgage market and the resulting credit crunch, which has been a big factor behind recent dollar weakness. The dollar rally was short-lived as U.S. data due this week could show persistent weakness in the U.S. economy, re-igniting selling pressure on the dollar.
Though the Euro has paused on its climb to the 1.50 level, it will likely breach this summit by year end. A surprise rise in the German Ifo survey is keeping the euro well supported. The Munich-based Ifo economic research institute said its business climate index, based on a monthly poll of around 7,000 firms, registered 104.2 after 103.9 in October. German Finance Minister Peer Steinbrueck said he expected the economic upturn in the euro zone's largest economy to continue in 2008 despite the strong euro. Steinbrueck also reiterated he was in favor of a strong euro and that he did not see any "pain threshold" for the dollar's weakness against the euro. "No one can have any interest in a weak euro," he said. Steinbrueck also said he was more skeptical about the outlook for economic growth due to the U.S. financial crisis, the high price of oil and the strong euro. Nonetheless there are signs that the euro's exchange rate is starting to approach levels which could worry policymakers. Some politicians such as French President Nicolas Sarkozy have been long-standing critics of the euro's strength. In the past week German ministers have also begun to express concern, after earlier taking a more relaxed attitude to the euro gains.
The British pound remained firm as a pick up in risk appetite gave sterling a lift versus the euro and the yen, but the overall tone on the currency remained reasonably cautious given market expectations for a rate cut by next February.
Off of Monday’s multi-year highs, the Japanese yen is lower across the board this morning. Bank of Japan Governor Toshihiko Fukui said that the BOJ is looking at the risk of excessive moves in financial markets and their unwinding when conducting monetary policy. Fukui also said the central bank needs to help make market corrections orderly. Investors are wary of BoJ intervention and tend to consolidate after sharp moves.
With oil prices down over $2 a barrel on speculation that OPEC would raise its output in coming months, the Canadian dollar weakened against the U.S. dollar. Risk aversion has become the dominant theme in the market and the possibility of rate cuts in Canada is back on the table. The strength of the Canadian dollar has hurt the manufacturing sector and Bank of Canada officials have said the currency's rapid appreciation could dent economic growth. The Bank of Canada meets on Dec. 4, and the market is divided on whether it will cut its key overnight rate. With the loonie nearly back to par with its U.S. counterpart, the central bank may have significant reason to hold off a rate cut until next year.
The Australian and New Zealand dollars both held onto recent ranges as investors remain side lined due to risk aversion. With the news from Citi early this morning, the currencies were able to gain some ground, climbing from the 2-1/2 month lows they hit in yesterday’s trade.
