U.S. Dollar Holds Ground; Trading Remains Light

The U.S. Dollar finished higher on Tuesday against most major currencies in another round of light trading.

The U.S. Dollar finished higher on Tuesday against most major currencies in another round of light trading. Traders opened the New York session averse to risk, but shifted this sentiment a few times during the day session. The Dollar bent at times, but never broke.

Firmer U.S. equity markets triggered renewed demand for risk at the mid-session. This helped to weaken the Dollar while fueling a rally in the higher yielding Australian Dollar and New Zealand Dollar.

The Euro was down early as traders took a more cautious view of the Euro Region economy now that the fiscal problems in Greece have subsided. Traders are citing the possibility of an uneven recovery in the economy as one of the reasons for the weakness. They are worried that the European Central Bank faces too many upcoming challenges regarding growth and inflation to trigger a reasonable appreciation in the Euro.

Another concern for traders is the possibility that the recent Greek budget cuts will fail to shore up their deficit situation. This is why Greek officials are pushing for the European Union to provide backing in the form of a bailout package should the need arise to support the Greek economy. On Monday, German Chancellor Angela Merkel said that such a proposal is not on the table, citing an EU agreement that prevents a bailout.

The weaker Euro on Tuesday indicated that traders had already discounted last weekend’s friendly comments from the French which stated that the EU stands ready to support Greece if necessary. In addition, although net short positions in the recent CFTC Commitment of Traders Report fell during the last week, Tuesday’s overall weakness indicates there is still plenty of interest in the short side of the market from larger well-funded hedge funds.

On Tuesday, Greek Prime Minister Papadreou met with President Obama. He was not there to discuss a U.S. bailout, but instead wanted the U.S. regulators to open up an investigation into Euro market manipulation and excessive speculation.

During the New York session, the EUR USD gained strength at times on renewed talk of a possible bailout of Greece by the European Union. Without any major economic reports to guide it, the Euro remains sensitive to any news regarding Greece.

Short-covering triggered by the weakening Dollar helped to boost the GBP USD off its lows early in Tuesday’s trading session. Later the GBP USD extended its weakness from Monday after Fitch Ratings issued a cautious outlook for the U.K. economy. Besides the possibility of a credit rating cut by the credit reporting agencies, bearish traders cited political uncertainty and a dovish stance by the Bank of England as other reasons for the weakness.

Another reason for the recent decline in the British Pound is the lack of trust with the Bank of England. Recently, BoE member Kate Barker said that the economic recovery in the U.K. is “broadly on track”. She did add that the economy faces a “bumpy” road because of high unemployment and tight credit markets. Recent economic reports indicate that her assessment is a little skewed.

This morning it was reported that the RICS House Price Balance Index fell short of expectations. In addition, UK trade data was disappointing and cast doubts over the economy recovery.

The renewal of risk aversion helped to pressure the USD JPY initially this morning. Japanese investors are also becoming concerned that the recent rise in the Japanese Yen will hurt its export market. The break in the Euro helped to boost the USD CHF. Investors once again became concerned that the Swiss National Bank may have to intervene to weaken its currency versus the Euro. The SNB is mandated to protect its export market which accounts for up to 50% of its total economy.

The shift in risk sentiment meant less demand for commodity-linked currencies such as the Canadian Dollar. Lower gold and a huge overnight drop in crude oil helped to buoy the USD CAD. Oversold conditions also contributed to the strength.

The Australian Dollar was feeling downside pressure this morning as traders dumped higher yielding assets. Losses were limited by the news that the National Australia Bank Business Confidence Index rose 4 points in February. The strong rally in the U.S. stock markets helped the Aussie mount a rally into the close to finish on its high.

Downside pressure drove the New Zealand Dollar lower early, but this market recovered due to the strength in the U.S. stock markets to help it finish near the high. Later this week, the Reserve Bank of New Zealand is expected to leave its benchmark interest rate unchanged. The poor economy is likely to mean that the RBNZ will not even consider a rate hike until late in the year or after the economy shows sustained growth.