Thursday, July 21, 2011

U.S. Debt Ceiling Debate & EU Greece Aid Program - 21 July 2011

Previous session overview

The euro rose against the U.S. dollar on reports that Germany and France have agreed on a strategy for designing a new aid program for Greece, which raised hopes that European leaders will announce further rescue measures for the debt-laden country at Thursday's EU summit.

No details were released, but a senior euro-zone official told that the joint proposal will include measures to lower Greece's debt with a bailout about equal to the EUR110 billion it received last year. 

The source said that it will also lower the interest rates Greece must pay and will also include participation by the private sector. Agreement to revised terms by private-sector creditors has been seen as a contentious element because it could lead to Greek bonds being declared in partial default. 

The euro rose to USD1.4275 and JPY112.54 on the news, up from USD1.4219 and JPY111.93 in late New York trade Wednesday. By 0530 GMT, it was at USD1.4265 and JPY112.50. 

The yen meanwhile staged a brief tumble in mid-afternoon, with dealers citing large buying by a non-Japanese player as the most likely reason. The dollar jumped about 30 pips to JPY79.03. As of 0530 GMT it was at JPY78.86 from JPY78.78 in late New York trade on Wednesday. 

The U.K. pound was at USD1.6168 from USD1.6151 while the dollar was at CHF0.8218 from CHF0.8194 against the Swiss franc. The ICE Dollar Index was at 74.654 from 74.827. 

The Australian dollar fell, meanwhile after the HSBC preliminary July China PMI dropped to 48.9 from June's final reading of 50.1, indicating the first contraction in manufacturing activity since July 2010. It was at USD1.0732 from USD1.0744.

Market expectation

If the euro zone leaders can agree on the strategy that should boost the euro while funding currencies such as the dollar, yen and Swiss franc will likely face selling pressure said dealers.

The USDJPY is up, but the bias is likely downward toward month-end as selling pressure is likely to gradually increase amid continuing risk-aversion, say dealers. The continuing U.S. debt ceiling debate is likely to keep investors from buying the greenback, they say. The pair is at JPY78.83, after rising to JPY79.03, from JPY78.72 before the latest spike. The pair may fall to JPY78.30 later in the day, dealers say.

European stocks are seen opening tentatively higher Thursday, with investors cautiously optimistic that euro-zone leaders will be able to reach an agreement on a second bailout for Greece when they meet later in the day.