Dollar Pares Recent Gains Despite Euro Debt Crisis
The dollar tailed off versus most majors on Tuesday, as traders bet that recent gains were overdone given the fundamental weakness of the U.S. economy.
While Europe’s sovereign debt crisis threatens to spiral out of hand, the dismal American economy will keep interest rates near zero for an “extended period,” limiting the upside for the rebounding dollar.
The minutes of the latest Federal Reserve policy meeting revealed that policy makers were conflicted on providing further stimulus for the sluggish U.S. economy.
The Fed acknowledged that the pace of the economic recovery slowed in recent months and conditions in the labor market softened, a view confirmed by Friday’s dismal jobs report for June.
The U.S. trade deficit surged in May to the highest level in almost three years, due to a big increase in oil imports, according to the Commerce Department. The deficit increased 15.1 percent to $50.2 billion in May.
The news comes on the heels of Friday’s dreadful jobs report and few indications that the housing market is in recovery.
Across the Atlantic, European officials scrambled to contain a sovereign debt crisis that could engulf Italy and Spain — much larger economies than tiny Greece.
Finance ministers of 17 countries that share the European currency vowed to provide longer maturities and a more flexible rescue fund on Monday to help Greece and other EU debtors.
The finance minister from the Netherlands admitted today that a selective default for Greece is on the table, much to the chagrin of the European Central Bank, which has warned about the dangers of any default.
And Italy was in the crosshairs of bond vigilantes. With borrowing spreads rising, the European Central Bank is rumored to be buying Italian and Spanish debt in hopes it can prevent a full-blown crisis.
Bank of America-Merrill Lynch warned that further weakness in Italian bonds could threaten the global recovery.
“Italy’s borrowing costs could reach levels that would make its debt dynamics unsustainable in a week,” analysts at BoA said.’
The buck hit $1.3836 in early dealing against the euro, its highest since March, but dropped to $1.4025 by mid-day.
The dollar slipped back to $1.5930 versus the sterling after hitting a nearly 6-month peak of $1.5780.
The yen was the big winner, rising to a 4-month high of 79.16 against the dollar and making gains against other majors.
