Dollar Up on European Woes

The US dollar is broadly higher; boosted by renewed pressure on the European periphery. Greece is still the lightening rod, but the contagion is clearer today. Just like the premium Greece is being forced to pay over Germany is back to the widest of the week, so too has the euro returned to the lower end of this week’s range. Key support is seen in the $1.3480-$1.3500 range. A break could spur a quick return to last week’s low below $1.3300. Sterling is faring somewhat better. It recorded a 7-week high near $1.5525 before being dragged back down. Support is seen near $1.5350-80. The yen is outperforming. The euro and sterling had been trending higher against the yen are forcing momentum players to unwind, and this is also helping the yen hold its own against the otherwise firm US dollar. The dollar is also firmer against most of the emerging market currencies.

Asian shares were helped by the strong US earnings reports and the new cyclical highs for the US indices. The MSCI Asia-Pacific Index climbed about 0.7% to a 20-month high. Accelerating growth with the strongest Chinese quarterly GDP report in 3 years and news that the BOJ upgraded its economic assessment in 7 of 9 regions, on the heels of that incredible Singapore GDP report yesterday, underscore the attractiveness of the region. Rising computer shipments and shipments in general (see UPS earnings yesterday), have also boosted share prices in the region. European shares began higher, but the debt/deficit issues are proving too much. Most markets are off by around 0.5%. Technology and health care are holding on to modest gains, but basic materials, consumer goods and financials are the biggest drags. The early call is for US shares to open around 0.3% lower.

The main focus in the bond market is the continued sell-off in Greek bonds. The 10-year yield is up almost 30 bp today at 7.35% and the 2-year yield is up 22 bp at 6.80%. Because the political will of Germany and other creditor nations is being questioned, the risk to Portugal, Spain, Ireland (and to a lesser extent, Italy) is being perceived as greater and this is evident in widening spreads and credit default swap rates. US Treasuries may be drawing a safe haven bid.