The dollar rallied after the FOMC minutes from the previous day dented hopes of more stimulus and a rise in risk aversion caused by renewed eurozone concerns increased haven demand. The FOMC minutes only mentioned a stimulus once and was overall upbeat about the economy, which sent signals that QE3 was now much less likely.
Meanwhile, the dollar also gained following a dissapointing auction of Spanish bonds on Wednesday which resulted in lower demand and higher yields. On the data front, ADP Employment Change fell, but less than expected to 209k vs the 205k expected, whilst the previous month had shown a 230k print. The dollar stalled later after the release of ISM Non-Manufacturing Composite, which showed a slow-down in activity in March, posting a 56.0 print vs a 56.8 expected and 57.3 previous result. MBA Mortgage Applications meanwhile for the week ending March 30th rose by 4.8% when the previous week had shown a -2.7% fall.
EUR
The euro weakened after concerns about Spain increased following the poor performance of the country's bonds in auction where they generated lower-than-expected demand and risk premiums increased from previous sales. Spain sold 2.6bn in 2015, 2016 and 2020 bonds on Wednesday which was at the lower end of expectations which had been of a sale of between 2.5-3.5bn.
The yields on the 3-year jumped to 2.89% vs 2.44%, whilst bid-to-cover halved; the 4-year bonds rose to 4.32% versus 3.37% expected and a bid-to-cover down from 4.1 to 2.5 and the 8-year saw a yield of 5.34% versus 5.16% previous. The euro fell after the news as it highlighted Spain's economic problems. Recently the government had to revise their deficit target from the EU target of 3% to a more easily achievable 5.3%.
Data from the budget also showed an expected rise in the debt-to-GDP ratio from 68% in 2011 to an expected 79% in 2012, and a rise in the already high unemployment level. Meanwhile the ECB rate decision also on Wednesday resulted in no change to monetary policy, despite, calls from Germans to increase rates as a result of inflationary fears, however, the renewed risks from Spain encouraged the central bank to maintain its more accommodative stance.
GBP
The pound weakened against most counterparts on Wednesday as a result of a fall in risk appetite. However, it rose versus the euro due to the specific problems suffered by the eurozone, most recently as a result of a loss of confidence in Spain after a deepening of the recession there. UK data was also relatively upbeat after Services PMI showed an above-expectations rise. March Services PMI came out at 55.3 against expectations of 53.4 and previous month's result of 53.8.
Given the importance of the services sector to the U.K economy the data must have encouraged a stronger outlook for the economy. A run of positive data recently had helped offset the bad news from the end of last year and was helping to counter fears that the country might be falling into a recession. Whilst expectations had been that the BOE would increase its asset purchases in May to help stimulate the economy, the recent strong run of data could be beginning to alter the probabilities of such an event happening, which should filter through as added strength for the pound. Nevertheless, Europe is the UK's largest trading partner and continued problems on the continent could offset gains and still result in a weaker pound even without additional stimulus.
JPY
The yen rose on Wednesday after a rise in risk aversion led to safe-haven buying of the Japanese currency. Fears surrounding Spain's economy after recent data showed the country was falling deeper into recession and a Spanish bond sale on Wednesday saw higher yields and lower demand sparked fears of another funding crisis in the periphery.
The yen was also up against the dollar - an unexpected turn of events given the recent FOMC minutes, which indicated the Fed was unlikely to go ahead with QE3, thus further increasing the interest rate differential between the two currencies in the dollar's favour. A massive storm in Japan, which left 4 dead, and damaged the cooling system at the Onagawa nuclear power plant is also likely to add weight to existing concerns about the safety of nuclear power following the Fukushima disaster.
This is likely to stall the reopening of Japan's nuclear power stations after they were closed for stress tests and weigh on the economy as it will have to continue importing costly fossil fuels. The outlook for the yen, therefore remains neutral despite today's temporary strength, as eurozone debt concerns offset weaknesses from the country's deteriorating balance of trade.