The Dollar and the Euro

Dollar Posts Biggest Three-Day Advance Since May as Risk Bends

Benchmarks for investor sentiment are toeing the line and threatening pivotal changes in underlying trends. That said, a few of the higher-profile barometers for the risk-reward balance have yet to take that critical step to shifting the backdrop of one from hope to fear. And, without investors fully committing to the deleveraging effort, the dollar’s advance will always carry a notable degree of doubt. With this recent swell of concern and volatility, we have seen the Dow Jones FXCM Dollar Index (ticker = USDollar) post its strongest three-day advance since the series through May 24. Yet, we have not even overtaken 10,200 with this drive much less reached the previous 20-month high just above 10,300 set back on June 1. It is tempting to call a total trend shift when individual pairs mark an impressive move, but conviction in an underlying theme – like the bearing on risk appetite – should carry the entire market. This is true even for the world’s most liquid currency pair: EURUSD. Individual efforts generate breakouts, but market-wide adherence produces lasting trends.

To this point, we have seen risk global risk trends ‘bend’ under the weight of renewed Euro-area financial problems. An already stressed global situation that includes pained growth forecasts, a more skeptical assessment between top and bottom lines earnings, and the dawning of reality that yields do not compensate for the level of risk that is currently presented leverages the masses’ susceptibility to concerning forecasts; but it does not guarantee a wholesale flight to safety. We need risk trends to ‘break’. And, to break this impasse, the market must concede that further stimulus will be ineffective in permanently keeping troubled assets afloat – rather than simply focusing on the likelihood of more. We are likely to see more support, especially as the capital market backdrop deteriorates. And so, we see that ‘QE3’ speculation is holding back the recognition of a more troubled future. This past session, the WSJ suggested the Fed would act at its August 1rate decision or sometime in September to spur growth (without officials’ commentary to back it up), and the market accepts the hope. We may have to wait until US GDP for resolution.

Euro Tumbles Again as Greece Speculation Picks Up Spain’s Slack

The euro fell against all but the Swiss franc (which is in essence unmoved) this past session. When risk aversion sweeps over the market, it easily exposes the fundamental troubles that the shared-currency faces. Yet, even without a critical eye for anything and everything ‘at risk’, the euro will find itself under pressure. This time around, the Euro-area crisis is the primary catalyst for broader investor sentiment. Under these circumstances, the world’s second most liquid currency will be prone to loses that don’t necessarily encourage the broader market to fall in line. In a more fundamental assessment, the difference between the euro and traditional risk trends may boil down to the belief that even if officials cobble together another rescue effort for the region, it will not be enough. Whereas global authorities could erect a firewall that curbs the spread.

In the meantime, the fundamental stress continues to build for the regional financial system. Spain was still a headline topic, but the explosive headlines of Valencia and four other regions possibly seeking federal support lost some of their influence. Speculation that the country will ask for a full bailout and/or that the ECB may reactive its SMP program are floated but ultimately unconvincing. Meanwhile, Troika representatives have arrived in Athens. Quoting unnamed sources, Reuters mentions three EU officials that say the country significantly missed its targets.

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