Dollar Hammered Overnight; Risk Sentiment Returns

The U.S. Dollar is trading lower overnight against most major currencies except the Japanese Yen as optimism over Greek debt woes triggered renewed interest in higher yielding assets.

The U.S. Dollar is trading lower overnight against most major currencies except the Japanese Yen as optimism over Greek debt woes triggered renewed interest in higher yielding assets. The markets are also making adjustments on speculation that China is readying to announce a revaluation of the Yuan.

The Euro is trading higher in a continuation of the move which began on Thursday following optimistic comments regarding Greece from European Central Bank President Jean Claude Trichet. The ECB President dismissed speculation that Greece would default on its debt.

The comments from Trichet have been quite supportive for the Euro which is helping to trigger this morning’s bounce. Despite the rally, traders should remain cautious because the problems which triggered speculation in the first place that Greece would default on its debt still exist. Some short traders are covering their positions on speculation that the International Monetary Fund will step in at any time to bailout Greece.

Look for a huge short-covering rally if the IMF steps in to provide much needed relief for Greece. Traders should also watch the latest CFTC Commitment of Traders Report to see if the 70,000+ shorts lightened up their positions substantially.

Overnight it was reported that German exports rose in February after falling the previous month. This news helped underpin the Euro as it fueled optimism that the pace of the recovery in Europe’s largest economy may actually be improving at a faster pace that previously expected.

On Thursday, U.S. Treasury Secretary Geithner met with Chinese officials in a diplomatic gesture to convince them to allow the Yuan to increase in value against the Dollar. After Geithner left, China gave no indication toward revaluating its currency, but most analysts believe that sometime over the short-run it will allow the Yuan to appreciate against the Dollar.

If China allows the Yuan to appreciate then look for the Japanese Yen to benefit while the Australian and New Zealand Dollars will most likely suffer.

Firm U.K. inflation data is helping to propel the GBP USD overnight. The U.K.’s March Producer Price Index accelerated 0.9% versus 0.3%. The annual rate rose 5% versus a guess of 4.3%. This report coupled with the unexpected rise in final Q4 GDP is another sign that the economy is improving.

The USD CHF is trading lower because of the improvement in the Euro. The strong rise in the Euro is diminishing the chances of an intervention by the Swiss National Bank.

The USD JPY is trading higher because of increased demand for riskier assets. U.S. equity markets are higher overnight which is encouraging Japanese investors to sell the Yen in an effort to take advantage of the better returns in the U.S. equity markets. Signs of a global economic recovery are being read as a plus for risk sentiment. Losses in the Yen may be limited because of comments from the Japanese government saying the likelihood of a double-dip recession has been diminished.

Higher gold and crude oil prices are helping to pressure the USD CAD. Demand for the Canadian Dollar is strong because of the prospects of a hike in interest rates by the Bank of Canada ahead of the U.S. Fed. Today, the Canadian Dollar will get its direction from the Canadian Employment Report. Look for the addition of 25,000 jobs and an 8.2% unemployment rate.

Stronger demand for higher yielding assets is driving up the AUD USD and NZD USD. Earlier this week, the Reserve Bank of Australia raised its benchmark interest rate to 4.25 percent. This was the 5th month out of 6 that the RBA hiked rates. The spread between Two-Year Australian debt over Two-Year U.S. Treasuries rose to 398 basis points earlier this week. This was its highest level since July 2008. The interest rate differential between Australia and the U.S. is driving investors into the higher yielding Aussie.

Improvements in the spread between the New Zealand debt and comparable U.S. Debt, is driving investors into the Kiwi. Speculation that the Reserve Bank of New Zealand will raise its benchmark rate sometime after June is also providing some support. Traders seem to have shrugged off the recent International Monetary Fund Report calling the NZD USD overpriced. Support is also coming from a government report which said the New Zealand budget cash deficit was narrower than its forecast.