US Dollar Appreciates Against Euro on Fresh Greek Worries

The US Dollar appreciated modestly against the Euro and other major currencies despite fresh highs in the US S&P 500 and noteworthy declines in Treasury bond yields. Renewed turmoil in European markets allowed the Greenback to gain ground through the overnight session, but the safe-haven dollar slipped into later trade as major equity indices saw fresh highs. A busy economic calendar had comparatively little effect on the domestic currency; strong Treasury International Capital flows data roughly offset disappointments in an early-morning Initial Jobless Claims figures. 

 

TIC data showed that foreigners bought a net $47.1B in US financial assets through the month of February—considerably above consensus forecasts of a $29.1B gain and over three times the $15.0B inflow seen through January. The result perhaps overshadowed the fact that China reduced its holdings by $11.5 billion through the same month, but data nonetheless showed that foreigners bought a net $48.1 billion in US Treasury Notes and Bonds. Given a glut of supply in US government debt securities, the net purchase came as welcome news and shorter-dated Notes rallied into the later session. Earlier Jobless Claims numbers had comparatively little effect. Analysts blamed the unexpected rise in unemployment insurance claims on administrative issues surrounding the timing of spring holiday seasons and not on legitimate labor market weakness. 

 

Traders now turn their attention to tomorrow’s Housing Starts and University of Michigan Consumer Confidence data, and any surprises could force noteworthy short-term moves in the US Dollar and domestic financial markets. Nascent signs of turnaround in the domestic housing market depend on continued strength in Housing Starts and Building Permits indicators, and it will be important to see figures print at or better than consensus forecasts. The subsequent University of Michigan Consumer Confidence report takes on additional significance in light of recent Nonfarm Payrolls data showing that the economy added a significant number of jobs in March. Consensus estimates call for the highest index reading since January, 2008, and any disappointments could quite possibly force sharp declines in recently-buoyant US equity markets. 

 

Related: Discuss the US Dollar in the DailyFX Forum, EURUSD Exchange Rate Forecast

 

The Euro was the worst-performing major currency on renewed Euro Zone fiscal worries, sparked by legitimate fears that Germans would reject bilateral financial aid to Greece and derail plans to bail out the floundering Greek government. The German finance minister said that the domestic parliament would likely need to vote on the proposed package—placing a very clear hurdle to its actual implementation. Prominent eurosceptics in Germany likewise said they would ask the Constitutional Court for an injunction to prevent bilateral transfers to Greece on constitutional grounds. 

 

The combination was enough to send short-dated Greek treasury bills to incredible heights, and it seems increasingly clear that the EMU/IMF may need to act sooner than later. According to Bloomberg’s data streams, Greece’s 3-month bills now yield an incredible 6.50 percent—an unbelievable 511 basis points above yesterday’s rates at 1.86 percent. To be fair, these instruments are relatively thinly traded and it is difficult to know true market prices—much less day-to-day changes in those prices. But it is difficult to ignore the stratospheric yields that Greece would theoretically need to offer if it were to auction 3-month bills in current market conditions. 

 

Any event risk on the calendar will take a back seat to ongoing developments in the Greek fiscal crisis. Traders seem to be calling the EMU and IMF’s bluff and arguably forcing it into action. Whether or not officials will actually be able to enact emergency measures is another matter entirely, however, and the mere uncertainty may be enough to force further euro losses. 

 

Related: German Finance Minister Fans Fears on Greek Bailout