The single currency gained to 1.3243 versus the US dollar on Monday as compared to 1.3156 on Friday’s North American trading session. The Euro also advanced 15 percent versus the Japanese yen.

The ICE dollar index DXY which measures the US dollar’s performance versus its six major rival currencies declined to 78.973 on Monday as compared to 79.334 on Friday’s late trading hours.

The US dollar also fell in reaction to the decision of China to reduce its reserve requirements for lenders making riskier assets more attractive. Global head of currency strategy, Marc Chandler from Brown Brothers Harriman commented, “The combination of a 50 basis point cut in China’s required reserve ratios and anticipation that the European finance ministers sign off on the second aid package for Greece has lifted equity markets and most of the non-U.S. dollar currencies.”

Exchange Rates

The euro rose as high as $ 1.3292 versus the dollar as the news emerged, its highest in nearly two weeks, before settling around $ 1.326. Meanwhile, versus the yen, the euro reached highs of Y106 before slipping back modestly. The agreement on the bailout programme, while long expected, will help Greece meet repayment needs next month. However, there are still many hurdles for EU policymakers which could keep the euro under some pressure.

Sterling has gained some ground versus the dollar, aided by the pick-up in the euro and generally improved market sentiment. Though its gains have lagged those of the EUR, the GBP is also being helped by some recent data which have pointed to signs of recovery in the UK. However, markets are wary of pushing the pound much higher given concerns that the Bank of England may yet pump more money into the economy.

Meanwhile, the minutes of the January FOMC meeting showed additional QE a possibility to help stimulate the US economy, further denting risk appetite and, as such, providing the dollar with some additional support.
Sterling gained against the generally weaker euro following the Greek news. It also took some support in earlier trading from the tone of the BoE’s quarterly inflation report, which contained an upward revision to the two year inflation expectations and, as such, dampened somewhat expectations of further quantitative easing. Whilst Sterling trades at the bottom end of the range against most counterparts at present the rate to buy Euros has improved by over 1% from yesterdays low – this provides buyers with an opportunity to get out of the market while we trade near the high.

The euro gained to 1.3201 versus the US dollar as compared to 1.3165 on Monday’s late trading hours. The pair EUR/USD touched the intraday high of 1.33 on Monday. The Dollar index DXY which measures the US dollar performance in comparison to its six major rival currencies fell to 78.963 on Monday as compared to 79.149 on Friday’s North American trading session.

However, most of the analysts said the investors were still uncertain about the single currency and were betting against the euro. Currency strategist, Ray Farris commented, “Half of our respondents believe that clients are now adding to risk, an increase from 37% in our last survey, investors appear most bearish on the dollar, the Japanese yen and the Swiss franc, while the survey showed mixed euro-sentiment,” he further added, “The U.S. dollar’s among most bearish currencies for the first time since August 2011.”

Among other currencies, the British Pound gained to 1.5776 versus the US dollar on Monday as compared to 1.5734 on Friday’s North American trading session. The Australian dollar advanced to 1.0743 as compared to 1.0657.

Against the Japanese yen, the greenback slightly moved to 77.60 on Monday as compared to 77.61 on late Friday.

Exchange Rates

There was little reaction to yesterday’s ECB policy meeting which saw the central bank leave rates on hold and provide no real clues as to whether a further rate cut is on the cards, though the markets has pulled back in terms of its expectations. Sterling rose versus the dollar and euro yesterday after the BoE announced that its was increasing QE by Stg50bln, a smaller amount than some had anticipated. It was supported ahead of the announcement by December’s better than expected industrial production data, which showed that output was up 1.0% on the month. The GBP, however, gave up gains versus the dollar overnight while remaining generally steady against the euro. This morning sees the release of UK PPI data for January, which will be watched ahead of next week’s CPI release for the same month but, in general, it is events in Europe that are likely to set the tone for the Pound going into the weekend.

Meanwhile, the dollar rose versus the yen in early morning trade amid talk that potentially poor demand for at US bond sales (10-year and 30-year bonds) later this week could see a narrowing in the gap between US and Japanese bond yields. The dollar rose as high as Y77, its best level since late January. US interest rate expectations have already firmed somewhat following the release of last Friday’s better than expected US non-farm payrolls report. This has raised speculation that the Federal Reserve may move forward its timing for an official rate hike.

Benefiting from the general improvement in risk sentiment, sterling rose to a 12-week high versus the dollar yesterday, though is has underperformed the euro. $ 1.60 remains a point of key resistance for the GBP. However, markets are also likely to be wary of pushing the pound too far ahead of tomorrow’s policy announcement from the BoE. Many are expecting further QE but this is not a done deal and unchanged policy could provide a further lift for sterling.

Chief currency strategist, Dean Popplewell from Oanda Corp commented, “Any signs that Papademos’ government will fulfill any of Troika’s conditions to receive funds by March to avoid a disorderly default will pressurize the weaker euro shorts in an illiquid market.”

The euro declined to 1.3124 against the US dollar on Monday as compared to 1.3147 on Friday’s North American trading session.

The dollar index DXY which measures the US dollar’s performance against its six major rival currencies surged to 79.064 on Monday as compared to 78.969 on Friday’s late trading hours. Among other currencies, the British Pound gained to 1.5830 versus the US dollar as compared to 1.5817 on Friday in reaction of expectations of monetary policy easing in upcoming meeting of Bank of England. The Australian dollar fell to 1.0731 versus the greenback as compared to 1.0777 on Friday.

Against the Japanese yen, the US dollar declined to 76.58 on Monday as compared to late Friday.

Exchange Rates

This is also a key week for the US dollar with markets eagerly awaiting Friday’s release of the first official employment report of 2012. Following on from December’s surprise increase of 200,000, markets will be looking to see whether this performance can be maintained, with consensus forecasts showing a rise of 180,000. The unemployment rate, meanwhile, is forecast to hold at 8.5%. Wednesday’s ADP employment report should provide some advance direction for markets. This week also sees the release of the US manufacturing and services ISMs for January, as well as the Chicago PMI for month. The ISM headline indices are forecast to show activity in both sectors at reasonably robust levels. The employment components, meanwhile, should also provide some direction ahead of payrolls. Finally, markets will be paying close attention to Fed Chairman Bernanke’s comments on the US economy before the House Budget Committee on Thursday.

After the two-day meeting, the central bank of the world’s largest economy said it would maintain a policy of “highly accommodative,” weighing on the greenback, at least until the end of 2014. While traders expected that the institution confirms his promise to leave its key interest rate to fluctuate exceptionally low (between 0 and 0.25%) until mid-2013, this extension shows that expansionary FOMC members do not rejoice around the recent improvement in economic indicators released in America.

The single currency benefit indirectly from this decision, especially as the bond market continues to enjoy some peace despite the lack of visibility about Greece and conditions of the second aid plan. After several figures have been quoted by various sources in recent days, Charles Dallara, head of the Institute of International Finance (IIF), representing the private creditors of Athens, reiterated his refusal to take on a voluntary basis, a discount of over 50%, as originally planned in late October. The old bonds would then be exchanged against new securities whose interest rate has yet to be finally determined. Although the IFF requires 4% of Europe such as the IMF requires an additional effort of the banking lobby.

Nevertheless, the noose is tightening for Greece, which will honor a refund of more than 14 billion euros on March 20 without prior agreement about the second international support.

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There is talk that we could see some resolution to the talks today but there is also speculation that a final deal will not be done until Greece can show further commitment to fiscal reform. There is also some issue over whether the ECB will participate in some way in the deal, given its now large holdings of Greek debt. It is not part of the official private sector investor talks but it holds about $ 50 billion of Greek debt (about one seventh). Meanwhile, the IMF has called on Greece to accelerate structural reforms but slow down its deficit reduction. This morning sees the release of final eurozone PMI data for January, which are expected to confirm flash estimates.

In the UK markets will be looking to January’s CIPS manufacturing survey for some direction. The index showed an unexpected bounce in December and is forecast to show another modest rise for last month. Sterling is pretty upbeat ahead of the data after hitting two and half month highs versus the dollar yesterday, while also making gains versus the euro. The Irish manufacturing PMI for January, released this morning, showed a reading of 48.3, down from 48.6 in December. This marks the third consecutive month that activity has been below the key 50 level. Consumer confidence at least has improved, with the latest KBC/ESRI sentiment index at 56.6 from 49.2 in December. However, while consumers are a little more upbeat the index remains far below its long term average.