Dollar Rises Sharply on Concerns about Stability of Euro Region Economies

Investors are selling higher risk commodities and stocks and buying lower yielding assets on concerns the sovereign debt issues in Greece will spread to other economies in the Euro Region.

Investors are selling higher risk commodities and stocks and buying lower yielding assets on concerns the sovereign debt issues in Greece will spread to other economies in the Euro Region. The Dollar is trading higher versus all major currencies except the Yen.

Investor concerns about the sovereign debt woes in Greece ignited the break, but a decision by the Bank of England and poor U.S. jobs data helped to accelerate the rally in the Dollar. Traders are taking protection and seeking shelter in the Dollar and the Japanese Yen.

The EUR USD is trading sharply lower, pressured by concerns that despite the proposal of a new budget plan, Greece lacks the means to deal with its deficit issues on its own. Fears are also being raised that the fiscal problems in Greece are not isolated and may spread throughout the Euro Region should it default on its debt. Risk aversion is setting in and traders are bailing out of the Euro as they seek protection against the possibility of a collapse in Greece.

This morning the European Central Bank announced that interest rates would remain at 1% and stimulus intact as the economic conditions in the Euro Zone have not improved enough to warrant any changes. Although ECB President Trichet said he “is confident” that Greece would get its budget under control, traders are acting as if it is going to take a bailout by the European Central Bank, European Union or International Monetary Fund to take care of the problem.

At the mid-session, the Euro is trading under an important 50% at 1.3800. Downside momentum is strong which could drive this market to the .618 level at 1.3483.

The Bank of England as expected announced that interest rates would remain at a historically low level. In addition, they voted to take a pause in its quantitative easing program, but left open the possibility it would increase its asset buyback program should conditions warrant such a move.

The USD JPY is under pressure at the mid-session as investors are seeking safety in lower yielding assets over concerns about the possibility of sovereign debt default in Greece. Traders took the Yen higher after the ECB offered no viable solution to the problems in Greece, nor did it provide any confidence that the matter would not spread to other Euro Region nations. The Japanese Yen tends to strengthen during economic turmoil and uncertainty.

Look for this pair to be the risk sentiment indicator today. As long as the fear of default exists, the Yen should continue to appreciate. At this time, the Bank of Japan has no plans to halt the rise in its currency. This could help fuel a steep decline in the USD JPY over the near-term.

The stronger Dollar is pressuring demand for commodities, namely gold and crude oil. This is helping to pressure the Canadian Dollar. Strong upside momentum drove this market through the last main top at 1.0720. The weekly chart indicates that 1.0870 is the next upside target.

The weakening Euro has once again raised fears the Swiss National Bank may intervene to prevent the Swiss Franc from appreciating too much versus the Euro. This is helping the USD CHF mount a strong rally at the mid-session. Barring any changes with the Greece sovereign debt situation, the next upside target is 1.0942.

The AUD USD is trading sharply lower at the mid-session. News that Australian Retail Sales dropped 0.7% in December fueled most of last night’s break. Additional pressure is coming from a fall in demand for higher yielding assets. Concerns over risk are the catalysts behind today’s weakness. The December low at .8734 was broken, turning the main trend down on the weekly chart.

The NZD USD plunged to its lowest level since September overnight following the news that the New Zealand unemployment rate surged to its highest level since 1999. The move from 6.5% to 7.3% confirms the Reserve Bank of New Zealand’s concerns about a weak economy. Today’s bearish news may force the RBNZ to change its forecast for a rate hike from the middle of the year to later. Additional downside pressure is coming from traders dumping higher yielding assets because of the possibility that debt issues in Greece will spread to other Euro nations. The weekly chart reaffirmed the down trend when it broke through support at .6970.