G10 currencies and risk sentiment weaken; EUR/USD back above 1.2750

The Singapore dollar is trading at $1.2711 following a four-month low against the US dollar.

IG Markets Singapore said:

The Singapore dollar picked itself up off the floor after hitting a four-month low against the greenback last week.

It was trading as high as $1.2775 as the eurozone crisis has sent forex traders running for cover.

The local currency has now recovered a little and trades at $1.2711 this morning.

Riskier Asian currencies have taken a battering in the last fortnight and there is more downside risk as the eurozone crisis threatens to implode on itself.

A G8 meeting of world leaders looked to calm global markets at the weekend and now wants to push for growth.

This has helped stabilise equities, commodities and currencies which have suffered sharp falls in the last week. But the Singapore dollar faces an uphill struggle if it is to reverse this recent fall and start appreciating against its US equivalent.

GFT meanwhile noted (for the week ending 19 May 2012):

With Europe back in the headlines, investors around the world piled into the U.S. dollar this week. At the beginning of the year in our 2012 outlook, we said deleveraging is this year’s greatest risk and the biggest beneficiary would be the U.S. dollar.

Although the U.S. is not without its own problems, some of which came to light this past week, the attractiveness of U.S. Treasuries has kept the dollar in demand. Yesterday’s surprisingly weak Philadelphia Fed survey awakened speculation for QE3.

While the Federal Reserve has kept the door open to additional easing, we don’t believe that the decline in the Philly Fed survey is enough to push the central bank over the edge. The national ISM manufacturing index has recently diverged from regional indices and with the Empire State survey rebounding, the pullback in industrial activity in Philadelphia may not be indicative of manufacturing activity across the nation.

More importantly, jobless claims remain low. The high level of unemployment has been the source of the Federal Reserve’s concerns and the latest report showed very little change in claims. In fact, so far jobless claims have been consistent with a slightly stronger May non-farm payrolls report.

In other words, while another round of Quantitative Easing remains a possibility, we still believe that the Fed will abstain from introducing more stimulus for the time being. Like central bankers around the world, they want to see how Europe and Greece’s problems play out first.

U.S. stocks have already been dragged down significantly by Europe’s sovereign debt troubles and an escalation of uncertainty could lead to a sharper slide that could necessitate swift and decisive action by central banks. At that time, QE3 would a much more significant impact on risk appetite.

RBS, on the other hand, reported (for 18 May 2012 trading):

The USD weakened into the week's end during a very quiet session, as market participants potentially reduced some USD positions after 14 consecutive increases in the USD index (DXY).

Economic data releases and the latest headlines out of the Euro-area did not offer much in the way of impetus for the G10 currencies and risk sentiment in general weakened, with equities closing modestly lower.

EUR/USD moved back above 1.2750 while USD/JPY slowly slid lower towards 79.