Dollar Strengthens After Risk Aversion Rises On Spain Concerns

The dollar strengthened on Tuesday after risk aversion rose on concerns about the stability of the Spanish banking system. There was a short period during midday when it weakened, however, after data released showed mainly worse-than-expected figures. Consumer Confidence fell to 64.9 – rather surprisingly given the unexpected rise in Michigan Confidence on Friday evening, when expectations had been for a rise from 68.7 to 69.6. Dallas Fed Manufacturing Activity (May) fell to -5.1 from -3.4 when a rise to 3.0 had been forecast. The S&P/Case Shiller 20 City s.a (MoM) (Mar) fell from 0.15% to 0.09% after a rise to 0.20% had been expected; Composite 20 (YoY) meanwhile steadied at -2.57% when -2.60% had been expected and -3.54% previous; the Home Price Index (Mar) fell 4 basis points to 134.1, which was below expectations of 134.4, year-on-year it increased more than expected to -1.92% vs -3.05% estimated and -3.9% previous.

EUR

The euro fell to new lows on Tuesday as negative sentiment over Spain reached new depths after the rating agency Egan Jones downgraded Spain's debt rating to a B from BB-. Growing concerns about Bankia, which revealed losses of 3.3bn on Monday, and who's shares have reached historic lows, also weighed. The troubled lender has already been bailed out by the government despite assurances it would never bail out another bank. Grexit fears dissipated as a result of a change in opinion polls, which showed a wider lead of 5.7% opening up between New Democracy which is pro-bailout and Syriza which is anti-bailout/austerity. In addition, the smaller leftist Democratic left party, may hold the balance of power, and previously insisted on Syriza's involvement in the coalition, said it would only back Syriza if it pledged to stay in the euro. On the data front the euro was further weighed by data which showed headline CPI in Germany in May fell to 1.9% when it had been expected to remain the same at 2.1%.

GBP

The pound weakened on Tuesday after risk appetite fell globally on increased eurozone sovereign debt concerns. The pound fell to new lows against the dollar despite less doveish commentary from BOE officials. Comments from MPC member Jim Broadbent appeared to have little impact on the weakening pound even though he downplayed the likelihood of more quantitative easing (QE) saying he thought it unlikely amidst such stickiness in underlying inflation. The BOE's chief economist Spencer Dale was upbeat about the economy in a radio interview and expected growth to continue in 2012 and no immediate need for more QE as the stimulatory effects of existing measures continued to pump through the system. The pound also wasn't helped by a better-than-expected result in CBI reported sales which rose to 21 when a fall of 2 basis points from -6 to -8 had been forecast.

JPY 

The yen rose overall, particularly against riskier currencies, although gains were offset by the poor performance of data released on Monday evening. The Jobless Rate (Apr) showed a higher-than-expected rise of 1 basis point to 4.6% when it had been expected to remain at 4.5%; Retail Trade (Apr) fell much more than expected to 5.8% from 10.3% when a fall to 6.0% had been anticipated. It was not all negative, however, after Household Spending for the same period showed a less acute fall to 2.6% rather than 2.5% as analysts had forecast. On Tuesday Small Business Confidence fell to 47.2 from 47.6 previously. Reports of growing fears about Japan's ability to service its debt, which is larger than Greece's, may also have offset gains as domestic investors diversify away from government bonds into foreign real-estate. The worsening economic situation in Japan, a nuclear disaster and the possibility of a Greek-style crisis are combining to make Japan a less attractive place to stay.