Greenback Continues To Suffer

Currencies Direct July 27th 2011 - 2 minute read

The Dollar has made consistent losses this week and the continued
stalemate on the subject of extending the US debt ceiling, the greater the
problem for the currency. Without a doubt, it appears that the Greenback is
taking the brunt of the pressure compared to other assets. For example,
although US treasury yields have edged higher, there appears no sense of panic
in US
bond markets.

Failure to agree on the debt ceiling does not naturally mean
a debt default however it will increase the chances should an agreement not be
reached in the weeks after. Nevertheless, the impact on US bonds maybe
countered by the increased potential for QE3 or safe haven flows in the event
that no agreement is reached.

The worst case scenario for the USD remains no agreement on
the debt ceiling ahead of the August 2 deadline but a short term solution that
appears to be favoured by some in the US Congress may not be that much better
as it would effectively be seen as ‘kicking the can down the road’.

The better than expected package to help resolve Greece’s debt
problems last week dealt a blow to the USD as the almost perfect negative relationship
between the USD and EUR over recent months. Furthermore, the debt ceiling deadlock
is making matters worse. However, the situation can change very quickly and
should officials surprise us all and find agreement the USD could rally

Things are not looking great for the EUR as most of its
gains have mostly come by courtesy of a weaker USD rather than positive EUR
sentiment. The news hardly bodes well for the EUR, with data in the Eurozone
looking somewhat downbeat. For example, the Belgian July business confidence
indicator dropped to a 9-month low in line with the weaker than expected
outcome of the July German IFO survey last week.

In addition, there are still several questions about last
week’s second Greek bailout agreement and contagion containment measures
including parliamentary approvals and lack of enlargement of the EFSF which
could keep markets nervous until there are clear signs that implementation is
taking place successfully.

A clear indication that the EU agreement has failed to
inspire as much confidence as officials had hoped for is the lack of traction
in terms of narrowing peripheral bond spreads, with the exception of Greece. This
partly reflects a renewed ‘risk off’ tone to markets but this is not the sole

EUR/USD has extended gains benefiting from USD weakness
rather than any positive sentiment towards EUR, breaking above 1.4446, the
strong multi-month corrective channel resistance, signalling a bullish move.
The next level of technical resistance is around 1.4568 but direction will
continue to come from the debt ceiling talks.


Report by Phil Ryan

Written by
Currencies Direct

Select a topic: