Dollar Jumps as the Euro Sinks on European Banking Risks

The dollar index (DXY00) on Wednesday rose sharply by +1.03%. Concerns about the health of the European banking system hammered EUR/USD down to a 2-1/4 month low and sparked safe-haven buying of the dollar after Credit Suisse Group AG sank to a record low on liquidity concerns.  Also, the slump in stocks Wednesday boosted the liquidity demand for the dollar. 

Wednesday’s U.S. economic news was mixed for the dollar.  On the bullish side, Jan business inventories unexpectedly fell -0.1% m/m versus expectations of no change, which supports the economy as the drop in inventories may spark an increase in production as companies replenish depleted supplies.  Also, the Mar NAHB housing market index unexpectedly rose +2 to a 6-month high of 44, stronger than expectations of a decline to 40.

On the negative side, U.S. Feb PPI final demand fell -0.1% m/m and rose +4.6% y/y, weaker than expectations of +0.3% m/m and +5.4% y/y with the +4.6% y/y gain the slowest year-on-year increase in nearly 2 years.  Also, the Mar Empire manufacturing survey general business conditions fell -18.8 to -24.6, weaker than expectations of -7.9.

EUR/USD (^EURUSD) on Wednesday sank by -1.33% and fell to a 2-1/4 month low.  

Tuesday’s Eurozone economic news was bearish for EUR/USD after Italy Jan industrial production fell -0.7% m/m, weaker than expectations of -0.4% m/m.  A plunge in Credit Suisse AG to a record low Wednesday fueled concerns about the health of Europe’s banking system and undercut the euro.  EUR/US is also under pressure on speculation that the ECB may raise interest rates by only 25 bp instead of 50 bp as originally expected Thursday due to the turmoil in the banking system.  In addition, Wednesday’s plunge in the 10-year German bund yield to a 5-week low weakened the euro’s interest rate differentials.

Wednesday’s Eurozone economic news was mixed for the euro. On the negative side, the German Feb wholesale price index eased to +8.9% y/y from +10.6% y/y in Jan, the slowest pace of increase in 1-3/4 years.  Conversely, Eurozone Jan industrial production rose +0.7% m/m, stronger than expectations of +0.3% m/m.  Also, France's Feb CPI (EU harmonized) was revised upward by +0.1 to a record high 7.3% y/y.

USD/JPY (^USDJPY) on Wednesday fell by -0.63%.  The yen Wednesday rallied to a 1-month high against the dollar.  The plunge in T-note yields Wednesday was bullish for the yen.  Also, higher Japanese government bond yields were supportive for the yen after the 10-year JGB bond yield rose +5.5 bp to 0.329% Wednesday when the BOJ offered to buy only 50 billion yen ($372 million) of bonds maturing in 25 years or longer, compared with its usual purchase of 100 billion yen.

April gold (GCJ3) on Wednesday closed up +20.40 (+1.07%), and May silver (SIK23) closed down -0.158 (-0.72%).  Precious metals Wednesday settled mixed, with gold climbing to a 5-week high.  Turmoil at Credit Suisse Group AG on Wednesday added to heightened concerns about the global financial sector and sparked safe-haven buying of precious metals.  Also, a plunge in global bond yields Wednesday was bullish for metals.  However, a stronger dollar Wednesday limited the upside in metals prices.  Silver gave up an early advance and turned lower on concerns the global banking crisis would lead to an economic slowdown that undercuts industrial metals demand. 

• Credit Suisse Plunges to a Record Low and Hammers Global Financial Stocks
• Dollar Little Changed on Strength in Stocks and Bond Yields
• Stocks Jump as Bank Stocks Rebound and U.S. Consumer Prices Ease
• Dollar Falls Back on Reduced Rate Hike Expectations