Euro tumbles as summit fails to appease

USD

The dollar gained against most counterparts on Monday after measures agreed at the recent E.U summit in Brussels were seen as insufficient to safeguard the euro. Risk appetite fell and safe-haven demand for the buck increased as analysts criticised the new 'deal' for Europe which they said did not do enough to re-capitalized and secure cash-straped euro-zone banks and that there was insufficient fire-power for a bailout of a major core country such as Spain or Italy. Constraints on the power of the ECB to buy the bonds of struggling peripherals were also seen as problem. The main focus for the dollar looking ahead is the FOMC tomorrow and the question of whether there is a chance of further quantitative easing (QE) from the Fed. Analysts think it unlikely that the Fed will increase its QE as recent figures have shown a reasonable level of growth picking up and seeds of a recovery. The focus will be on the commentary from Ben Bernanke for signals as to the direction of future policy. Further data tomorrow will focus on Retail Sales which as expected to rise by 0.6% vs previous 0.5%. Data out later this afternoon, meanwhile is expected to show a rise in the Budget Deficit of -$150bn vs -$98.5bn previously.

EUR

The euro fell heavily at the start of the week after market participant's reflected on the deal agreed at the E.U summit in Brussels and found it severely lacking. Insufficient help for cash-strapped euro-zone banks combined with a worsening credit market situation; a lack of funds for the EFSF to help bailout any of the larger nations such as Spain or Italy, and concerns about the drawn out process required for implementation all weighed. The euro was further hit after the credit rating's agency Moody's gave a warning that it was reviewing several euro-zone nations for a possible downgrade given the lack of safeguards to reassure investors. This added to concerns voiced by Standard & Poors last week when they placed 15 E.U nations under review. This added to fears of mass downgrading, which could further push up already sky-rocketing borrowing costs. Indeed on Monday peripheral bond spreads over German bunds were already rising after the news. Data was mixed with German Wholesale Prices (Nov) rising by 0.7% MoM and -1.0% YoY, whilst YoY the figure fell to 4.9% vs 5.0% previous. French Current Account (Oct) deficit, meanwhile, fell to -4.5bn vs -4.3bn previous, whilst French Wages in the 3rd quarter fell to 0.3% vs 0.6% in the previous quarter.

GBP

Sterling tracked the euro lower in the earlier part of the day but was boosted midday as market participants increasingly came to see the UK's stance of vetoing E.U treaty change and standing outside the union as a strength and the pound pared some of its earlier loses. The euro meanwhile continued lower breaking the close correlation which has existed between the two currencies. There was nothing on the economic docket and the pound is still broadly down on lower risk appetite sparked by question-marks about the adequacy of the measures agreed at the E.U summit. It is possible gilts are still playing a safe-haven role and sterling is benefiting from those capital flows. The next major focus for the pound is CPI tomorrow which is expected to fall to 4.8% vs 5.0% expected, and if this is the case the slow-down in price increases may be taken as a sign of an economic slowdown – increasing the argument for the BOE raising its QE programme further, as some policy officials have hinted at recently. However a Bank of International Settlements (BIS) report today argued QE had little effect on growth given the already very low interest rates, thus dampening further faith in the so far preferred mechanism for generating growth.

JPY

The yen strengthened versus most counterparts after a rise in risk aversion increased haven demand for the Japanese currency. The threat of downgrades to euro-zone debt from rating's agency Moody's sparked the collapse in sentiment, after another agency Standard & Poors placed 15 of the ?17 euro-zone nations on negative watch last week. Widespread disappointment at what had been seen as inadequate measures to stem the crisis at the recent E.U summit also weighed. Volatility in yen pairs, however, was comparatively muted with speculation the hand of the Japanese authorities could be seen offsetting yen gains by stealthy intervention. Another explanation could also be that investors have increasingly sought liquidity which is a characteristic of the dollar. On the data front worse than expected prints helped support the rise in risk aversion, with Consumer Confidence falling to 38.1 vs 38.3 and Machine Tool Orders also down by 15.4% vs 26.0%. Tertiary Industry Index out later today is expected to rise by 0.4% vs -0.70% previous. Stocks, meanwhile were also pressured by the possible nationalization of TEPCO the company which owns the Fukushima Nuclear Plant which has struggled since the disaster.