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Dollar And Yen Strengthen On Increasing Risk-aversion

5/30/2012 4:17 AM ET

The risk-aversion re-surfaced in the market on Wednesday morning, after some positive sentiments had propped up yesterday, which in turn prompted traders to seek safe-haven dollar and yen.

Optimism gathered pace Tuesday on speculation that China will come out with larger stimulus to bolster the lagging economy. The market was expecting the red dragon to announce a stimulus package worth over USD 300 billion.

However, the momentum waned after the state-run Xinhua News Agency said yesterday in an article on economic policy that China may not come up with stimulus measures of the scale seen during the global financial crisis in 2008 to help revive economic growth.

Worries over the eurozone debt crisis increased after the Bank of Spain Governor Fernandez Ordonez decided to quit the post one month ahead of schedule, handing the responsibility of dealing with the country's deepening banking sector crisis to a successor.

Ordonez, who came under heavy criticism following the recent nationalization of Bankia, met Prime Minister Mariano Rajoy on Tuesday and conveyed his decision to leave on June 10 instead of July 12, reports say citing a statement from the Bank of Spain.

Meanwhile, according to the Financial times, the European Central Bank has blatantly rejected Spain's plan to recapitalize the troubled lender Bankia using sovereign bonds and then swapping them for cash at the ECB's three-month refinancing window.

Bankia, one of the largest banks in Spain, had asked for a whopping EUR 19 billion state aid on May 25 after receiving EUR 4.5 billion in rescue funds in 2010.

The negative sentiments sent the dollar hitting above the 1.2450 level against the euro for the first time since July 2010 and a tad above the key resistance of 0.9650 against the Swiss franc after a gap of more than 15-months. The next barriers could be seen at 0.9750 against the franc and 1.2150/55 against the euro.

A leading indicator of Switzerland's economic activity increased for a fourth consecutive month in May, suggesting that the year-on-year growth of the economy is gaining momentum.

The KOF Institute's economic barometer rose 0.38 point to 0.81 in May from 0.43 in April. Economists had forecast a reading of 0.4. This indicates that during the next few months and on a year-on-year basis, Swiss gross domestic product can be expected to grow noticeably, the Institute said.

The dollar also advanced to the second consecutive day against the pound to touch a fresh 4-month high of 1.5565. The cable is presently worth 1.5575 with 1.5535 seen as the next likely target level.

The yen also advanced across the board on increasing safe-haven flows, hitting fresh multi-month highs of 98.69 against the euro, 82.19 against the Swiss franc and 123.47 against the pound. Against the US dollar, the Japanese currency climbed to a 1-week high of 79.31.

The Japanese unit also outperformed against the resource-linked currencies on Wednesday morning, hitting multi-day highs of 77.45 against the Australian dollar, 60.21 against the New Zealand dollar and 77.28 against the Canadian dollar.

Further rally may push the yen to cross resistance levels at 79.20 against the greenback, 122.85 against the pound, 98.55 against the euro, 82.0 versus the franc, 77.0/05 against the aussie, 59.90 against the kiwi and 77.0 against the loonie.

The aussie fell as retail sales in Australia declined a seasonally adjusted 0.2 percent to come it at A$21.212 billion on month in April. That missed forecasts for an increase of 0.2 percent following the upwardly revised 1.1 percent gain in March - which originally was pegged higher by 0.9 percent.

Looking ahead, the U.K. mortgage approvals data for April and the Eurozone economic confidence index for May are scheduled for release shortly.

The U.S. pending home sales report for April is due at 10:00 am ET.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

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