Euro Weakens As Buying Spree Ends

The dollar traded mixed on Monday as it strengthened against its main counterpart the euro but was in general weaker versus most other currencies. Commentary from the Fed was on the whole more positive with St Louise Fed's Bullard expressing optimism over unemployment, which he expected to fall to the “low 7's” by the end of the year, and the fact that the three-month average of Non-Farm Payrolls was over 200k was “an encouraging sign”. He talked about the Fed scaling back its open-ended asset purchase if there was some “good data for a couple of months,” or good signs in spring and summer. On the data front Factory Orders rose to 1.8% but not as much as expected. Tuesday sees the release of the Non-Manufacturing Composite, which is expected to fall to 55.0 from 55.7.

EUR
The euro weakened on Monday as a result of political uncertainty in both Spain and Italy. In Spain Prime Minister Rajoy faced calls from the opposition to resign after his party supposedly accepted illegal payments; in Italy Silvio Berlusconi caught up with the front-runner Bersani with elections close at hand, thus threatening the possibility of a clear majority. There were also fears the strong euro could be hampering exports. Euro-zone Sentix Investor Confidence (Feb) recovered to -3.4 from -7.0. Euro-zone Producer Prices y/y remained the same at 2.1% in line with expectations, also rising by 0.2% m/m -- also as forecast. The euro is expected to recover from the current correction and reassert the up-trend in time.

GBP
The pound rebounded on Monday despite data showing that Construction PMI failed to rise as much as had been expected: remaining unchanged at 48.7 when a rise to 49.2 had been expected. Other data was also lack-lustre, showing that the Lloyd's Business Barometer (Jan.) fell to 15 from 20. The pound probably strengthened versus the euro as a result of the sudden fears about political instability in the euro zone following a scandal involving the Spanish Prime Minister and a resurgence for support for Silvio Berlusconi in Italy. There was little data out for the dollar on Monday which tended to be weaker overall despite the overall rise in risk aversion.

JPY
The yen recovered on Monday after news of political instability in the euro zone led to renewed up-take of the Japanese currency as a safe-haven. Commentary from Japanese Finance Minister Aso fought back at criticisms from Europe that the BoJ's extreme monetary policy tactics was starting a 'currency war' of competitive devaluation. He also added that the authorities were using the policies adopted during the depression as inspiration for what to do now, at that time the BoJ underwrote government debt used for deficit spending, which rose by 34%. Further yen weakness was also expected after reports of life insurers unwinding hedges adopted when the yen was on the rise.