Forex: US Dollar Rallies on Threat of Greece Debt Downgrade despite S&P 500 Highs

• US Dollar: US Dollar Rallies on Threat of Greece Debt Downgrade despite S&P 500 Highs
• Euro Drops on Threat of Greece Sovereign Debt Rating Downgrade
• British Pound Falls For Third Day on Record U.K. Budget Deficit
• Australian and New Zealand Dollar Post Slight Gains Against Greenback, Loonie Continues Decline as CPI Softens

US Dollar Rallies on Threat of Greece Debt Downgrade despite S&P 500 Highs

The US Dollar finished roughly unchanged on the day on an empty economic calendar and despite fresh multi-year highs in the S&P 500. Traders pushed the financial market ‘risk’ barometer to fresh peaks on generally slow price action, and fast-falling volatility expectations suggest that few expect major moves in the days ahead. Tomorrow’s revision to third quarter US Gross Domestic Product figures and later-morning Existing Home Sales report post some risk of event-driven moves. Yet we feel it is likely that the Greenback will remain in a choppy range against major counterparts until the New Year.

Economists predict that GDP numbers will be revised marginally higher in the final release of Q3 numbers, and surprises are admittedly rare to late revisions to economic growth results. Event-driven moves could nonetheless come on the subsequent Existing Home Sales report, predicted to show noteworthy month-over-month growth of 7.1 percent through November. One gets the sense that the S&P and Dow Jones Industrials Average are at such lofty levels that any marginal disappointment could cause a noteworthy pullback in market risk sentiment. Of course, we would have argued the same just last week and equities show little willingness to do anything other than head higher.

It seems that market ‘risk’ is marching to the beat of its own drum, and currencies are likely to do the same amidst very limited market participation through the year end. We continue to warn against using excess leverage amidst choppy and unpredictable trading conditions.

Related: Top Forex Trading Ideas for 2011, Top Mistakes of 2010

Euro Slips As ECB Takes Foot Off of Stimulus Pedal

The Euro fell to fresh multi-week lows against the US Dollar amidst choppy trading conditions and sparked by threat of further downgrade to Greece’s Long-Term sovereign credit rating. Fitch Ratings announced that the debt-plagued Euro nation was under credit watch “negative” as its rating remains just a single notch above ‘Junk’ status. The news can hardly be taken as much of a surprise, and initial reaction was muted. Yet markets seemingly needed little excuse to push the single currency near its multi-month lows against the resurgent Greenback.

An essentially empty European economic calendar leaves the Euro to the whims of broader market moves. It serves to note that the correlation between the Euro/US Dollar and S&P 500 has almost completely broken down, and the pair has not rallied on strength in equity markets. We take such developments with a grain of salt as limited participation means that trading conditions may seem strange in the days ahead. As such, we will likely keep to the sidelines amidst fairly unpredictable market conditions.

British Pound Falls For Third Day on Record U.K. Budget Deficit

The British Pound declined for a third consecutive day, falling to a three-month low as the U.K.'s budget deficit swelled to a record high in November. Net borrowing totaled 22.8 billion pounds in the month, exceeding the 16.8 billion pound deficit expected by economists, and spending rose by the most since February. The data intensifies pressure on David Cameron's government to reign in the budget deficit, however further tax hikes and fiscal austerity measures could prove problematic during a time of weak economic growth. Furthermore, the U.K. financial system remains shaky, as U.K. banks maintain considerable exposure to Ireland, which could provide a threat to the broader economy. Due to these downside risks, the BoE will likely maintain an accommodative monetary policy going into 2011, which should continue to pressure the Pound lower. The U.K. economy may not have the benefits of low rates for very long however, as continued consumer price readings of over 3 percent year-over-year may force a rate hike in the near future.

Australian and New Zealand Dollar Post Slight Gains Against Greenback, Loonie Continues Decline as CPI Softens

The Australian and New Zealand dollars moved slightly higher against the Greenback as commodity prices saw marginal gains amid equity indices moving above pre-Lehman collapse levels. The Aussie rose 0.26 percent to $0.9963, while the Kiwi rose 0.09 percent to $0.7429 after Credit Card Spending data for November showed no change, a sign that consumer spending could be cooling. Furthermore, the Reserve Bank of Australia’s Minutes of their last meeting showed that the central bank would keep interest rates on hold for an extended period longer, but future rate changes would be contingent upon mining sector investment. Meanwhile, the Canadian dollar fell again versus the Dollar; the Loonie was down .12 percent to $1.0180 as investors clearly found that a softening Consumer Price Index for November outweighed stronger-than-expected Retail Sales from October. Tomorrow, New Zealand’s 3Q Gross Domestic Product figures will be released, which are expected to show slight expansion.