Dollar Trades Mixed On Fears Of Possible Greek Exit From The Euro Bloc

The U.S. dollar traded mixed against most of its peers as ongoing concerns over Greece’s possible exit from the euro bloc dampened demand for high-risk assets and weighed on sentiment. In the U.S., bondholders lowered the inflation forecast by the most since December, thereby supporting the case for further quantitative easing by the Federal Reserve, especially since last week’s economic data showed that the job sector is improving at a slower pace than expected. Concerns over the crisis in the euro region, including concern over the outlook for Spain, increased demand for safe havens and caused the Canadian dollar to weaken the most in four months against its American counterpart.

The loonie recouped some of its losses temporarily after the G8 summit produced a consensus that Greece should remain within the euro monetary zone. However, sentiment took another hit as E.U. leaders failed to come up with a solution to stem market turmoil arising from the problems in the region. Trading of the CAD was light as markets in Canada were closed yesterday for Victoria Day holiday.

In the eurozone, the shared currency’s recovery lost some of its steam on reports forecasting another contraction of Spain’s economy for the second quarter. And although Finance Minister Luis de Guindos said that the country will “meet its deficit target” investors remained cautious. The euro gained somewhat versus the greenback as Germany’s Finance Minister, Wolfgang Schaeuble stated that Germany and France will do whatever is needed to keep Greece as a member nation.

The British pound remained weak against the U.S. dollar as risk aversion dominated the market on the prospect that Greece may depart from the E.U. The sterling erased some of the losses early in the day as the G8 summit concluded and its participants affirmed their desire for Greece to remain a part of the eurozone. But demand for the sterling remained subdued since last week’s BOE reports warned of the risks the U.K.’s recovery faces due to the situation in the E.U.

The yen fell against the majority of its peers on indications the Bank of Japan will intervene in the market and add to stimulus measures in order to boost economic growth and reduce the value of the Japanese currency. With problems in the E.U. mounting, it’s likely that the yen will continue to benefit from risk sentiment, which is detrimental to the export sector. Bank officials will begin a two-day meeting starting today.

Lastly, the South Pacific currencies remained almost unchanged against the greenback as market investors exercised caution despite pledges by European leaders to stem the region’s debt woes.

EUR/USD- G8 Leaders Agree On Greece

The G8 summit came to a conclusion and leaders from the E.U. affirmed their desire for Greece to stay within the euro monetary zone. However, since they failed to come up with a solution to placate the turmoil in the markets, investors remained cautious. The euro traded mixed versus the U.S. dollar and weakened as the outlook for Spain weighed on sentiment. According to the most recent releases, Spain’s budget deficit for 2011 widened much more than expected. In addition, uncertainty over the outcome of the Greek elections remains high and investors fear that Greece won’t live up to its financial responsibilities. According to analysts, the euro has also dropped in anticipation of today’s reports which are expected to show a big decline in Consumer Confidence.
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GBP/USD- Home Prices Steady

The British pound remained almost unchanged versus the U.S. currency on concerns over the situation in Greece and the debt crisis in the E.U. It appears that the manner in which the eurozone's leaders are managing the situation is weighing on sentiment and investor confidence. In the U.K. Rightmove indicated that the pressure on finances caused by the sovereign debt crisis has prompted home sellers to maintain their property sales price unchanged since April. This is the first time since 2002 that prices haven’t risen in the month of May, the month in which sellers take advantage of spring, a big season for house buyers.
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USD/JPY- BOJ May Intervene

As Bank of Japan officials gather for a two-day meeting, market investors were speculating that the central bank will intervene in an effort to boost economic growth. In addition to the issues in the euro region, sentiment has been affected by lackluster economic reports out of China adding to demand for refuge. This has caused the value of the yen to increase, a factor that will be taken into account at the meeting. According to statements by the country’s Finance Minister Jun Azumi, the government is watching the speculative moves in the market. It’s expected that market volatility will rise as the problems in the E.U. mount.
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USD/CAD- Loonie Slumps

The Canadian dollar fell to a four-month low versus the greenback on concerns the crisis in the euro region will worsen especially as many have predicted that Greece won’t live up to its financial responsibilities and will exit the euro region. Furthermore, worries over the economic situation in Spain continued as the nation’s Finance Minister stated that GDP will contract in the second quarter, an announcement that followed a release revealing that the 2011 budget deficit widened more than forecast. The loonie traded higher against the euro.
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Today’s Outlook

Today’s economic calendar shows that the U.K. will report on CPI and Core CPI. Also, the Bank of England may release the Inflation Letter. The U.S. will release data on Existing Home Sales. Japan will announce the Trade Balance and may issue an Interest Rate Decision, though it’s not certain.