US Dollar Slips as Sentiment Improves - What Impact Will the G-20 Summit Have?

The US dollar ended the day mostly lower against the majors - though the currency did gain against the Swiss franc, euro, and Canadian dollar – as increased risk appetite provided a boost to “riskier” assets like the New Zealand dollar and US equities, with the DJIA gaining 2.01 percent. Looking at the data on hand, the ISM manufacturing survey edged up to 36.3 in March from 35.8, which was slightly better than forecasts for a 36.0 reading. Most of the components of the survey registered small increases, including prices paid, production, new orders, employment, new export orders, and imports. That said, all of these indices remain well below 50, signaling a further contraction in activity, albeit at a slower pace. Meanwhile, the National Association of Realtors (NAR) said that pending home sales rose 2.1 percent in February, versus expectations for a flat reading. There have been a handful of housing-related indicators that have registered surprise improvements during February, which is a positive signal, but we need to see more consistent increases before judging that these moves indicate any sort of recovery.

Over the next 24 hours, the G-20 summit is easily the most important event to watch not only for risk trends, but for the US dollar in general. The biggest issue to be covered during this summit is financial regulation, which France and Germany are taking a hard line on as French President Nicolas Sarkozy has threatened to walk out if the G-20 does not draw up new standards that meet their "red lines,” which include restrictions on offshore tax havens and more hedge fund supervision. Also, while US President Obama and Chinese President Hu have reportedly not discussed replacing the US dollar as reserve currency ahead of the summit, there are concerns that this topic will be pursued, which could lead to sharp sell-offs of the greenback.

Swiss Franc, Euro the Weakest of the Majors Ahead of ECB Rate Decision - What to Watch

The Swiss franc tumbled across the board on Wednesday, as interest rates in the nation are amongst the lowest in the world and ultimately, only the high-yielders saw significant moves higher. This suggests that the currency is still considered one of the prime “safe haven” assets, despite the dismal economic and financial scenario in Switzerland. In fact, data released during the European trading session showed that the SVME Purchasing Managers’ Index (PMI) held at a record low of 32.6 in March. Even worse, this was the seventh straight month that the index held below 50, which signals a deepening contraction in manufacturing activity thanks to a broad-based drop in export demand.

While the Swissie was the biggest loser, the euro was the next weakest ahead of Thursday’s European Central Bank rate decision. According to a Bloomberg News poll of economists, the ECB will cut rates by 50 basis points to 1.00 percent on Thursday morning. However, Credit Suisse overnight index swaps are only pricing in a 25 basis point cut to 1.25 percent, suggesting that this could be a highly market-moving event. A reduction in line with Bloomberg's estimates could exert bearish pressures on the euro, while a 25 basis point cut could actually prop up the currency. Ultimately, though, where the euro ends the day may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Trichet tends to be highly biased in his commentary, and if he signals that additional rate cuts may be on the way the euro could tumble, even if they only reduce rates to 1.25 percent. On the other hand, indications that the ECB has no intention of bringing interest rates lower in the near term could ignite a euro rally.

Japanese Yen Ends Wednesday Mixed Despite Worst Tankan Reading Since at Least 1974

The Japanese yen ended Wednesday on a mixed note, as the currency fell against the “risky” majors, including the British pound, New Zealand dollar, and Australian dollar, which was in line with the gains seen in the DJIA and S&P 500. Meanwhile, the Japanese yen gained against the US dollar, Canadian dollar, euro, and Swiss franc despite dismal Japanese economic releases overnight. Indeed, the Bank of Japan’s Tankan gauge of sentiment amongst large manufacturers plummeted to -58 during Q1 2009 from -24 in Q4 2008, which marks the lowest since recordkeeping began in 1974. Furthermore, the Tankan measures of planned capital expenditures fell 6.6 percent, and while this is better than the expected result of -12.0 percent, it was the sharpest decline since Q4 2002.

Overall, the data indicates that businesses are being hit hard by the combination of the global economic slowdown and appreciation of the Japanese yen, as they have led to a record contraction in exports of 49.4 percent in February from a year earlier. Over the next 24 hours, the G-20 summit presents some potential for Japanese yen volatility as comments that trigger risk aversion in the markets could spur gains for the low-yielding currency. On the other hand, if investor sentiment improves following the G-20 summit, the Japanese yen could tumble across the majors, but especially versus currencies like the Aussie, Kiwi, and British pound.

Terri Belkas is a Currency Strategist at FXCM.