Euro fell sharply in the Asian session in reaction to a report that Belgian and French officials are renegotiating the dismantling of troubled Dexia Bank. This would threaten France’s AAA credit rating as a result of an increased fiscal burden on France. Meanwhile, sentiment was also dampened by data showing China’s November HSBC flash manufacturing PMI fell to a 32-month low. Growth contraction in the world’s second largest economy indicates the euro zone debt crisis is affecting global growth. EURUSD fell 0.6 percent from 1.3530 to 1.3450. The focus turns to euro zone manufacturing data later in the day that may indicate the debt crisis is damping economic growth. Euro could fall further if the data is negative.
The Australian dollar extended its losses on China’s weak manufacturing data and fell to a fresh six-week low against the US dollar. The Australian dollar is sensitive to changes in China’s economic fundamentals since China is a major buyer of Australia’s commodity exports. AUDUSD fell to 0.9855 from the session high of 0.9755. Since the end of October the commodity-linked AUD has fallen 2 percent due to weak commodity prices.
GBPUSD mostly mirrored EURUSD movements and hovered around six-week lows due to risk aversion. The pair opened in Asia at 1.5654 and fell to 1.5598 in reaction to the disappointing China manufacturing report. The focus will turn to the Bank of England policy meeting minutes due later today. Speculation is that the bank will signal that further quantitative easing is needed to stimulate a deteriorating UK economy. This would result in a weaker pound.
Yen gained against a broadly weak euro due to the news that French/Belgian bank Dexia is facing trouble and France may face a bigger burden to bail it out, and consequently threatening the country’s triple A credit rating. EURJPY dropped to 103.90 from 104.26. Dollar/yen trading was quiet in Asian markets due to the holiday in Japan. USDJPY opened at 76.96 and closed at 77.02.