Dollar Advance Struggles As Safe Haven Status And Recession Epicenter Roles Debated

The dollar’s rally from Friday’s began to ebb through the US session Monday as fundamental traders weighed the currency’s and economy’s exposure to risk appetite and the G20 summit only three days away. Despite the late turn to caution, though, speculators showed their general confidence in the greenback as a safe haven by leading the currency to its third consecutive advance. For an unbiased view, the Dollar Index extended its rally beyond the 84.25 breakout – now pushing 85.75. This same strength was reflected in the major crosses. EURUSD closed the session below 1.32; and despite a sharp intraday rebound, GBPUSD has pushed below 1.4275. We are now retracing the massive plunge the dollar suffered through March 18th and 19th following the Fed announcement that it was pursuing quantitative easing as another approach to its increasingly desperate rescue plan. This particular move in price action is notable; because it parallels the thematic fundamentals that are setting up the dollar’s future.

With the G20 meeting taking place on Thursday, market participants will have to decide ahead of time whether the dollar will continue to represent a safe haven for capital or if the world’s most liquid currency will be treated as the epicenter for a deteriorating financial crisis. There is a critical distinction between these two roles and the scenarios that can be developed from the outcome of the forthcoming meeting can vary dramatically depending on which way the market leans. While the debate is still ongoing, we can see that today’s event risk had more than a little influence over the outlook. Filling in for a light economic docket, traders were processing comments made by Treasury Secretary Timothy Geithner and a hardline action taken by the Obama administration against automaker GM. In an interview over the weekend, Geithner warned that some banks would still require “large amounts of assistance,” even though the Treasury only has an estimated $135 billion left in its financial-stability fund and many believe Congress will not allow another massive bailout pass through so easily. Despite the implications the Treasury Secretary’s comments have for investor confidence, it was clear that the greater and more immediate impact on price action came from another major rebuff for bailout funds. The autos task force put together by the president deemed survival plans submitted by both GM and Chrysler were unfeasible. So, instead of receiving another massive capital infusion from the government (GM was requesting up to $30 billion in loans), the US gave GM 60 days to develop a reasonable restructuring plan and Chrysler 30 days to close a deal with Fiat. If that wasn’t a clear enough sign that the US cannot fund an ongoing recession and financial crisis, officials have said expedited bankruptcy was an option.

Looking ahead to tomorrow, the market will continue to weigh the dollar’s value as a store of wealth against its exposure to another systemic seizure; but this time around scheduled event risk will be thrown into the mix. Topping the list of potential movers will be the Conference Board’s consumer confidence report. A pick up in sentiment would be an encouraging sign for consumption trends. The other visible release will be the lagging S&P/Case-Shiller housing inflation indicators could work with recent sales data to raise expectations for a bottoming in the housing market. We will also watch out for the wildcard initial jobless claims data as a leading indicator to Friday’s NFPs as well as Fed Stern’s comments in Washington on those economic players in the past deemed “too big too fail.”

Euro Weighed By Faltering Confidence, Retail Activity

European leaders’ have taken a clear stance against US and UK calls to increase financial stimulus; but data and forecasts may yet lead authorities down this path anyway. German Chancellor Angela Merkel made her position on government stimulus going into the G20 meeting clear when she said “we must recognize that after the crisis, we need to return to solid financials policies… [or]…we run the risk of already preparing the next crisis.” However, as the largest economy in the European Union, Germany may have greater responsibilities. Today, Ireland lost its top rated S&P debt rating and Spain was forced to rescue its first bank in 16 years. Making things worse, ECB member (and President of the Deutsche Bundesbank) Axel Weber warned German 1Q GDP could be much worse than the 4Q number and growth could be down sharply for all of 2009. Data was equally discouraging. The European Commission released its confidence survey numbers for March, and the sentiment was generally discouraging. Economic, consumer, and business readings all pushed to record lows. The bleak outlook for consumers was further reflected in Bloomberg’s retail PMI number for the same period. A 10th consecutive monthly slump merely feeds the recession.

Pound Finds Little Support From Data, Scottish Lender Bailout

For fundamental pound traders, it is becoming more difficult to justify the argument that the sterling is oversold on the basis that its global counterparts are suffering from economics that are quickly catching up to meet it. Today, traders were responding to another disappointing round of data and the government’s efforts to put out another financial fire. Top news in the early London session was that the UK government was lending Nationwide Building Society 1.6 billion pounds to purchase the purchase Scotland’s Dunfermline Building Society – and thereby prevent its collapse. For most traders (who benefit from free-market economics), this move was preferable to yet another nationalization. The sentiment from the economic docket carried the disappointment through. The Hometrack home price survey fell to its lowest reading on records going back to August 2008 by accelerating its declines to a 10.3 percent pace through March. More pressing though was the credit data for February. Net consumer credit through the month fell negative (0.2 billion pounds) for the first time since in 16 years. This more than offsets the modest uptick in mortgage approvals that has developed thanks to dramatic declines in prices and inventories.

Japanese Industrial Production Plunges But Managers’ Outlook Improves

A permanent correlation to risk trends kept the yen bid through Friday’s session as equities and commodities sold off world wide. And, though this currency’s once-indisputable place as the market’s top safe haven has been called into question through recent weeks, it is likely to shake off these doubts for the time being as concern over the outcome of the G20 meeting leaves investors few options. And, for those not prescribing to the influences of risk, the economic docket had its influence on yen price action as well. Thoughindustrial production slumped for a fifth month through February, inventories dropped a record 4.2 percent and plans to increase output grew 2.9 percent – the first rise in five months.

Terri Belkas is a Currency Strategist at FXCM.