Euro fell even further in the North American session to a fresh new 11-month low below the critical $1.30 level. Uncertainty about the euro zone debt crisis is driving market sentiment these past couple of days. On Wednesday morning Italy’s bond auction resulted in the yields reaching euro-era highs. This fuels concern that the already indebted country will have trouble sustaining such high borrowing costs. The Italian Treasury sold 3 billion euros of 5-year bonds and saw yields surge to 6.47 percent, the highest yield at auction since the inception of euro. EURUSD fell to 1.2945 in US trading before bouncing only slightly to 1.3008.
Meanwhile, what makes matters worse is that German Chancellor Angela Merkel is adamantly opposed to joint euro bonds and also reiterated her position on Tuesday that she is against raising the lending limit for the European Stability Mechanism, Europe’s permanent bailout fund.
The dollar index which measures the performance of the greenback against a basket of six other currencies, rose to 80.473 versus 80.303 Tuesday. The dollar usually performs well in times of heightened risk aversion in the markets because it is perceived as a safe haven asset and is the most liquid currency in the world. So investors dump risky currencies in favour of the dollar. The greenback is also supported by reduced expectations of further monetary easing following the Federal Reserve’s less pessimistic assessment of the U.S. economy on Tuesday.
Dollar rose against the Swiss franc to 0.9537 francs, the highest level since March. USDJPY peaked at 78.15 and remained supported above 77.97.
GBPUSD fell to a session low of 1.5608, the lowest since October 6 before bouncing back up to 1.5492.
The Canadian dollar weakened sharply against its US counterpart as it too was affected by a risk off environment. Also, the loonie is a commodity-linked currency and since Canada is a major exporter of crude oil, it is affected by oil prices. Oil tumbled 4.5 percent in New York trading, reaching a one-month low of US$94.20 from the New York open of US$98.68. This pushed USDCAD up to 1.0423 from 1.0358.
Gold fell due to the stronger dollar since the two have an inverse relationship. When dollar rises, gold falls because investors prefer to sell gold to hold dollars. Gold dipped to $1,563.18, the lowest since September 26. Gold has lost $65 an ounce on the day.