Dollar Takes A Hit Before The Weekend

Despite a remarkable lack of US-centric data on the global economic calendar Friday, the greenback took a beating through the morning as traders absorbed next week?s calendar and scanned the headlines for updates on the Bear Stearns? hedge fund debacle.

By mid-day in the US session, the majors were hovering near their anti-dollar session lows. Crossing the 1.34 level once again, EURUSD made a relatively smooth, 90-point rally to a new two-week high 1.3470. The British pound capitalized on the dollar?s weakness by driving GBPUSD to a new six-week high, just a few points shy of the psychologically important 2.0 level. Taking a break from its usual yield-garb, USDCHF plunged over 130 points after a hike to the Swiss 1-week repo rate raised concerns the yield differential between the two would close more dramatically than expected. A 1.2290 looked was standing up as weak support. Not following the swissie?s lead, the Japanese yen was range-bound against the dollar; but not before the pair set a new high at 124.15.
Once again lacking a clear fundamental base for price action, the dollar crowd was at the mercy of outside event risk. In the absence of economic indicators, the big question mark surrounding the sustainability of low volatility and high risk appetite was coming into focus. While theories as to what will be the final straw to snap volatility back to normal levels, and unwind of the carry trade in FX, are about as plentiful as the number of traders in the world; the Bear Stearns hedge fund story was still commanding the probabilities. Boosting the stakes this morning, Barclays announced that it had exposure to the High-Grade Structured Credit Strategies Fund. While there are likely other major banks that have capital tied up into the fund, the indirect effects of an implosion would likely be more deadly to the relatively complacent market. Though Merrill Lynch has reclaimed some $850 million of its stake in collateral assets, the fire sale may never come to pass. Reports suggest Bear Stearns is putting together $3.2 billion to bail out its internal hedge fund. This would be the largest rescue attempt since the LTCM blow up back in 1998. Regardless, the market will keep a vigilant eye on the deal and make sure the risk doesn?t spread to other firms and other markets. One sign that big money is hedging its risk just in case is seen in the treasuries market. The yield curve on government debt is the steepest it has been since October of 2005. Until the matter is resolved, short-dated maturities will likely remain well bid.
Looking ahead to next week, the economic calendar will be generating market action. A fully stocked docket will cover the housing, consumer and business sectors and give a FOMC rate decision to wrap everything up. Given the reaction to building permits and starts numbers this week, the market may not give pay much attention to home sales and price numbers in the days ahead, unless there are considerable surprises. Instead, Fed and GDP watchers will be more interested in the consumer data. The Conference Board?s read on sentiment is expected to slip in its June read, though gauges of spending and income from May are expected to improve. And though there is always some level of risk inherent in its mere presence on a calendar, the FOMC rate decision will likely have little impact on the dollar since there are few expectations for a shift in actual policy or rhetoric - though a tilt in the bias would certainly change the game.
Following the lead of the European and Asian markets, US equities opened the day in a tumble as investors looked to cut back on their risky trade. By 16:15 GMT, the Nasdaq Composite was pacing the declines with a 0.78 percent drop to 2,596.60. Both the Dow and S&P 500 were down 0.69 percent at 13,452.11 and 1,511.68 respectively. Though the major indices were in retreat Friday, the headlines were crowded with a number of strong performances. Equity traders from across the sectors were stepping back to monitor the Blackstone IPO auction, one of the largest in recent history. The firm raised $4.13 billion early as shares jumped 15.1 percent from their opening price to $35.68. Back in the normal cut of things, eBay shares were working on a promising 2.7 percent advance to $31.97 after announcing it would reenter the Chinese auction market this summer.
Participants in the treasury market were once again ignoring the weak speculation underlying a possible shift in Fed policy to instead concentrate on hedging themselves against their risky corporate debt holdings. The ten-year note was only 3/32nds higher at 94-27 with its yield down a basis point at 5.172 by 16:15 GMT. T-bonds were similarly little changed in a 9/32nds contraction to 92-01 as yields were bumped up a basis point to 5.284.