The dollar dipped below $US1 yesterday for the first time this year and remained subdued overnight, as currency investors shifted their money to traditional safe havens such as the US dollar and the Japanese yen amid fears Greece will exit the eurozone.

Financial markets and European banks are preparing for Greece to leave the 17-member currency bloc, and its struggles to form a coalition government are weighing on global equity and currency markets.

The National Farmers Federation's general manager of policy, Charles McElhorn, says the currency's downward trend will support the agricultural industry, which is one of Australia's most trade-exposed sectors. "We export about two-thirds of what we produce, and we're also increasingly exposed on the import market, so great news," he said.

The federation says that every 1 per cent fall in the Australian dollar equates to about $220 million in export earnings, meaning an additional income of close to $2 billion for the sector since the dollar began to slip a few months ago.

Industry Minister Greg Combet believes the weaker dollar is particularly good news for the manufacturing sector, which has been shedding workers in the last year. "In the last year or so we have seen a significant appreciation in value that has made those manufacturing businesses far less competitive and put a lot of pressure on them, and we have seen job losses as a result, so the slight depreciation in the dollar in recent days is good news for many in manufacturing," Mr Combet said.

But retailers say Australian consumers have become so unpredictable that it is hard to predict how a lower dollar will affect the retail sector. Australian National Retailers' Association chief executive Margy Osmond says a weak dollar increases costs for businesses that rely on imported goods, but it makes shopping online from overseas websites less attractive for Australian consumers, and so may benefit some domestic retailers.

"We don't know how much difference it will make to their online habits and we're not really certain at this point in time how much impact it will have on prices," Ms Osmond said.

"So I think it's going to be a 'wait and see'."Ms Osmond says the currency must remain below parity for a sustained period before any real benefits to the sector can be assessed, a view shared by the Australian Industry Group. And AI Group chief executive Innes Willox says many exporters have already taken advantage of the fall in the currency.

"This will make it a little bit easier in the short term for Australian industries which seek to export and those who are competing against importers, but this needs to be sustained for it to really flow through the economy and benefit industry," Mr Willox said.

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Australia's major banks have slashed their forecasts for the dollar, with some tipping it will drop to 98 US cents, triggered by further interest rate cuts and reduced government spending. The lower forecast come as the Aussie dollar fell below parity against the greenback in early afternoon trading (AEST). The dollar dropped as low as 99.96 US cents, the first time in 2012 that it has bought less than $US1. National Australia Bank has cut its outlook for the Aussie dollar to 98 US cents in September, from an earlier projection of $US1.02, blaming domestic rather than global factors for the lower prediction.

“It is the domestic factors which have changed and are likely to drive the Australian dollar lower quicker than we had previously anticipated,” said NAB currency strategist Emma Lawson. The central bank is a catalyst for part of the dollar's fall. Last week, the Reserve Bank lopped 50 basis points off its cash rate - its biggest cut since the depth of the global financial crisis - making the most of weak inflation figures to stoke demand in the sluggish economy. “The NAB economics team now expect two more 25 basis points easings, and possibly more if the economy further deteriorates," said NAB's Ms Lawson. “The additional easing now expected is driven by the weaker-than-expected economy,” she said, adding that one of the factors is “the contractionary fiscal policy” announced in the federal budget.

Budget drag
Ms Lawson predicts the federal budget, announced last week, will slice one percentage point from the economy's growth in the year to June 30 as the Gillard government attempts to deliver a surplus for the 2012-13 year. Australia's economy grew 2.3 per cent in 2011. Westpac, too, lowered its target for the Aussie from parity to 98 US cents by the end of September, following the RBA's rate cuts this month. Commonwealth Bank also trimmed its forecast to 98 US cents in June, down from a previous forecast of $US1.08.

“The macroeconomic combination of fiscal contraction and interest-rate cuts should lower the exchange rate,” Richard Grace, chief currency strategist and head of international economics at CBA in Sydney.
“Australia's terms of trade have peaked, and the Aussie should tread a little bit lower as a result of that,” said Mr Grace. CBA tips the Aussie dollar will be at $US1.05 in December, compared with an earlier projection of $US1.09, the bank said. The market is currently tipping a 70 per cent chance of a 25 basis point rate cut when the RBA meets in June, with investors tipping an official cash rate of 2.75 per cent in a year's time, down from 3.75 per cent now.

ANZ Bank sees the Aussie hitting $US1.04 in the current quarter, amid further RBA cuts and a weaker global economic environment. “Our expectations for further easing in the policy rate have increased,” said ANZ FX strategist Andrew Salter “With a 75 basis points in cuts, tipped taking the cash rate to 3 per cent by year's end.” “The near-term risks for the Australian dollar are building. It now seems fairly clear that the vulnerabilities lie to the downside,” he said.

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The Australian dollar is threatening to fall through parity with the greenback after political turmoil in Greece came back to haunt global markets overnight and investors digested the federal budget. Online shoppers and people planning trips to the United States will be keeping a close eye on the dollar today after it fell to $US1.007 this morning - its weakest point since December 22.

The Aussie has slipped as tensions in Europe threatened to derail efforts to ease the ongoing sovereign debt crisis. Frontrunners in the Greek elections have struggled to form a government following elections on the weekend, and issued warnings that earlier bailout deals for the troubled nation may be scrapped. The dollar traded as high as $US1.042 on May 1.

IG Markets analyst Stan Shamu said the dollar continued falling early today to reach its lowest point since December. “Parity is certainly not far away at all with pressure still firmly to the downside. With a sharp rise in risk aversion, commodities and risk currencies were the hardest hit,” he said.

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Indian Bank has revised the foreign currency non-resident (Bank) term deposit rates with immediate effect. The bank did not change the existing interest rate for deposits with maturity of one year and above, but less than two years at 2.30 per cent, a bank release said.

For deposits of two years and above, but less than three years, interest rates have been revised to 1.81 per cent as against the existing rate of 1.85 per cent. The interest rates have been cut to 1.92 per cent for those deposits of three years and above, but less than four years, from two per cent.

For deposits of four years and above, but less than five years, the interest rates have been fixed at 2.13 per cent from 2.23 per cent, it said, adding that for deposits of up to five years, interest rates have been revised to 2.36 per cent from 2.49 per cent.

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The euro remained lower following a three-day decline on bets that European Central Bank President Mario Draghi will hint at further stimulus measures to counter the region’s debt crisis after today’s policy meeting. The 17-nation currency was 0.3 percent from a two-week low versus the yen before Spain auctions debt. The dollar strengthened against most of its 16 major peers on demand for an investment haven. New Zealand’s currency touched the weakest in three months after data showed the nation’s unemployment rate rose to the highest level since 2010.

“There’s a very good chance that ECB President Draghi is going to be very dovish,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia. “There’s potential there that demand for Spanish bonds is quite weak and that would, I expect, push the euro down as well.”

The euro was at $1.3145 as of 11:37 a.m. in Singapore after sliding 0.6 percent to $1.3158 in New York yesterday. It fell 0.1 percent to 105.40 yen after touching 105.13 yesterday, the least since April 16. The dollar was little changed at 80.18 yen. Japan’s markets are shut today and tomorrow for public holidays.
The ECB will keep its benchmark interest rate at a record low 1 percent today, according to all economists surveyed by Bloomberg News.

Spain will auction three- and five-year notes today amid speculation that the euro area’s fourth-largest economy will follow Greece, Ireland and Portugal in seeking a bailout. The three-year yield jumped 11 basis points to 4.08 percent yesterday, up from this year’s low of 2.71 percent on March 1.

European Economy
Europe’s common currency dropped yesterday as London-based Markit Economics said its gauge for the region’s manufacturing was below 50 for a ninth month in April, a level that indicates contraction. The jobless rate in the currency bloc was at a 15- year high of 10.9 percent in March, a report from the European Union statistics office showed.

The euro has lost 6.9 percent over the past 12 months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar climbed 6 percent, and the yen strengthened 5.4 percent.

U.S. private employment increased by 119,000 workers last month, the smallest gain in seven months, ADP Employer Services said yesterday. The Labor Department will report May 4 that U.S. nonfarm payrolls added 160,000 jobs in April, up from 120,000 the previous month, economist estimates compiled by Bloomberg show. The unemployment rate will probably remain unchanged at 8.2 percent.
“I still think the U.S. dollar will continue to rise, even though some of the U.S. data might weaken a little bit,” said Commonwealth Bank’s Capurso. “It’s still a lot better than what is happening in the euro zone.”

N.Z. Dollar
New Zealand’s dollar, known as the kiwi, dropped to 80.41 U.S. cents, the least since January, before trading at 80.64, 0.5 percent below yesterday’s close. The nation’s jobless rate rose to 6.7 percent in the first quarter, Statistics New Zealand said today. That was higher than the most-pessimistic forecast in a Bloomberg survey of economists and up from 6.4 percent in the last three months of 2011. “The overall unemployment headline number is worse,” said Tim Kelleher, Auckland-based head of institutional foreign- exchange sales at ASB Institutional, a unit of Commonwealth Bank of Australia. (CBA) “The kiwi didn’t like the data.”

New Zealand Finance Minister Bill English said today a stronger currency makes it harder for exporters.
The Australian dollar may remain “largely neutral” with the nearest ceiling at its 200-day moving average, analysts led by Selena Ling at Oversea-Chinese Banking Corp. in Singapore, wrote in a research note today. A decline toward $1.02 may see support materializing, they wrote. The 200-day moving average was at $1.0351, and the currency hasn’t fallen below $1.02 since Jan. 9, according to Bloomberg data.

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While the interbank dong/dollar exchange rate had been kept stable for the 99th day until April 28, commercial banks have raised the dollar prices continuously since April 26, before the new regulation on banks’ daily foreign currency position takes effect in early May.

Banks try to buy more, block sale
On April 27, Vietcombank quoted the buy and sale prices at 20,850-20,930 dong per dollar, respectively. The prices quoted by BIDV were 20,840 – 20,910 dong per dollar, Eximbank 20,850 – 20,920, ACB 20,840 – 20,900 dong per dollar. The quoted prices represented the 10-20 dong per dollar increase in comparison with the previous day.

Especially, the dollar prices increased continuously last week with the price increasing by up to 30 dong per dollar some days. To date, the dollar price has increased by 70-80 dong per dollar since the beginning of the month. Meanwhile, the official dong/dollar exchange rate announced by the State Bank has been stable at 20,828 dong per dollar over the last three months.

The recent unexpected dollar price increases have been explained by the fact that banks are gearing up to cope with the new policy to take effect as of early May.

Commercial banks have been trying to collect foreign currencies. L, a dollar depositor at ACB, said that the dollar deposit at the bank is due in some more days. L was wavering between selling the dollars or not, because the dollar was too low. However, a bank officer has advised her to sell dollars to the bank, as the dollar price has increased by a little.

It could be a surprise to many people that banks still try to collect more dollars, while they have to bear tighter regulations on providing foreign currency loans as of May 2.

An expert said that the 50-70 dong per dollar increase in the last month does not mean that the demand is higher than the supply. However, the continued dollar price increases in the last week of April clearly showed that banks now need big amounts of foreign currency.

The expert, analyzing the markets which have influences on the dollar market, such as gold, import-export activities and credit growth, affirmed that the markets all have been stable, while the liquidity has become weaker, therefore, the markets could not be the reasons behind the recent dollar price increases.

The only reason is that banks have been gearing up to balance the foreign currency positions before the Circular No. 07 takes effect on May 2, under which the foreign currency position of commercial banks at the end of the day must not be higher than 20 percent of the owners’ equity.

“Some commercial banks made a mistake before when lending too much in dollars. Therefore, they now need big amounts of dollars to be able to satisfy the new regulation on the foreign currency position,” the expert said.

Meanwhile, Nguyen Hoang Minh, Deputy Director of the HCM City Branch of the State Bank of Vietnam does not think this way.

“I think that the dollar price has increased because banks now try to push up the lending in dollars before the day the State Bank tightens the conditions for borrowing in foreign currencies,” he said.

The dong/dollar exchange rate has been stabilized for a long period. Dragon Capital, for the first time in its 17-year operation in Vietnam, announced a couple of weeks ago that the net assets of the funds managed by the company had increased by 1.4 percent, since the dong has appreciated against the US dollars.

Just one year ago, they complained that Vietnam adjusted the exchange rate too many times, and they did not know what to say to investors about the dong value stabilization when raising funds, according to Thoi bao Kinh te Saigon.

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India’s ballooning trade deficit means it has to run just to stand still. Without steady capital inflows, the currency will collapse. But without a steady currency, it is hard to attract foreign capital. The rupee’s 19-per-cent fall against the U.S. dollar over the past year is worrying.

During most of the last decade, the current account deficit has been funded without great difficulty. Foreign direct investment, portfolio investments and about $60-billion (U.S.) a year of remittances have usually exceeded the shortfall in trade. India has accumulated around $300-billion of foreign currency reserves, equivalent to 17 per cent of gross domestic product.

But the annual trade gap has widened from $104-billion to $185-billion. At 3.7 per cent of GDP, the current account deficit is the highest since 1980, when the International Monetary Fund starting collecting data. High energy prices are the main culprit for the recent deterioration – oil accounts for two-thirds of the country’s import bill. Of course, the blow would have been less painful if India had a stronger export sector.

The support of foreign investors is more necessary than ever, but New Delhi’s mismanagement has discouraged them. Foreigners bought an average of $3-billion a month of Indian debt and equities in the first three months of 2012, according to the Securities and Exchange Board of India’s website. So far in April, they have been net sellers of $403-million.

The currency’s fall threatens to create a negative spiral. More expensive imports are inflationary and put pressure on corporate profits. Government subsidies of domestic fuel prices become more costly, adding to the fiscal deficit, which swelled to 5.9 per cent of GDP in the fiscal year that ended in March. Furthermore, the rupee’s slide creates financial stress for Indian companies that have borrowed in dollars.

India’s currency reserves provide a buffer. But if capital flows turn sharply negative the reserves could melt away quickly. And if investors start to believe that the rupee is a one-way downwards bet, they will race for the exit. Predictions of a declining currency – UBS suggested a further 6- per-cent fall last week – could prove self-fulfilling.

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SINGAPORE: The euro lost ground against the dollar in Asia Monday as wary traders withdrew their money from Europe after Spain's ratings cut and ahead of elections in key European states, analysts said.

The single currency bought $1.3236 in early trade, down from $1.3258 on Friday. The euro also lost ground against the Japanese yen, falling to 106.25 yen from 106.61 yen in the same time frame.
 
The dollar was at 80.27 yen from 80.29 yen on Friday.  Japanese and Chinese markets are closed Monday for a public holiday.  Traders were evacuating the euro after Spain's credit ratings cut on Thursday roiled the region ahead of elections in France, Germany and Greece this coming Sunday, said Justin Harper, market strategist for IG Markets Singapore.
 
"There's still been that backdrop of the Spanish downgrading... I think with the Greek and the French elections, no one wants to put too big a bet on the euro on that," he told.  Therefore, "traders would much rather be buying the US dollar," Harper added.
 
Spain announced on Friday that its jobless rate spiked sharply to 24.44 percent in the first quarter of this year, pushing unemployment in the debt-straddled nation to its highest level since 1996.
 
Ratings agency Standard and Poor's on Thursday slashed Spain's credit rating two notches to BBB+ with a negative outlook and warned of recession this year and next which will make it even harder to meet its deficit-cutting targets.
 
French, German and Greek elections to take place on Sunday also added to market uncertainty as traders preferred to keep their money on the sidelines in case of unexpected outcomes.
 
Despite a slew of holidays scheduled in most Asian countries for the next four days, DBS Group Research said the coming week would be a hectic one due to the elections as well as other key meetings. (AFP)

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The yen rose for the first time in three days versus the euro and dollar, even before a meeting tomorrow where the Bank of Japan may boost stimulus measures, after the Federal Reserve said yesterday U.S. borrowing costs will stay at virtually zero into 2014.

The euro dropped against Japan’s currency after economic confidence fell in the 17-nation region. The pound gained to its highest level since September versus the greenback after U.K. consumer confidence climbed more than economists estimated. The dollar remained weaker after Fed Chairman Ben S. Bernanke said yesterday the central bank is ready to introduce more stimulus if the economy deteriorates.

“The expectation is that the BOJ will increase the asset purchase program, and the scope for disappointment is helping the yen stay strong,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “You also get the sense that people were expecting a more hawkish Fed, and they didn’t get that.”

The yen gained 0.5 percent to 80.97 per dollar at 4:27 p.m. New York time and touched 80.67, the strongest level since April 17. It appreciated 0.3 percent against the euro, to 107.18. The U.S. currency weakened 0.2 percent to $1.3237 per euro after reaching $1.3263, the weakest level since April 3. Japan’s currency rose against all of its 16 most-traded counterparts, and Brazil’s real was the biggest loser. The real slid 0.3 percent to 1.8850 per dollar. Norway’s krone depreciated 0.2 percent to 5.7332 per to the greenback, and South Africa’s rand weakened 0.1 percent to 7.7582.

The yen stayed higher versus the dollar even after an index of pending U.S. home purchases rose more than forecast, pushing stocks up. The National Association of Realtors’ gauge of the sales increased 4.1 percent in March to the highest level since April 2010. A Bloomberg News survey projected a 1 percent rise. The Standard & Poor’s 500 Index gained 0.7 percent.

Fed policy makers refrained yesterday from new actions to stimulate the economy, while saying the housing sector remains depressed and global financial strains present “significant downside risk.” They repeated their view borrowing costs are likely to remain “exceptionally low” at least through late 2014. The benchmark interest rate has been at zero to 0.25 percent since December 2008.

While they upgraded forecasts for growth this year to 2.4 percent to 2.9 percent, policy makers lowered projections for growth in 2014 to 3.1 percent to 3.6 percent, below a January estimate of 3.3 percent to 4 percent.

“Right now, equities are higher and the dollar is weaker,” said Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York. “That’s consistent with a market that’s still expecting the Fed to do more.”

Bernanke said yesterday after a two-day Fed policy meeting that central bankers “remain prepared to do more” if economic conditions worsen. U.S. gross domestic product rose at a 2.5 percent annual rate in the first quarter after advancing 3 percent in the previous three months, according to the median forecast of economists surveyed by Bloomberg News before a report tomorrow.

The Bank of Japan (8301) is due to release new inflation forecasts tomorrow and will probably announce an increase in asset purchases ranging from 5 trillion yen ($62 billion) to 10 trillion yen, economists surveyed by Bloomberg said. “Yen direction will remain mainly driven by safe-haven demand linked to developments in the euro zone,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo- Mitsubishi UFJ Ltd. in London.

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Yesterday S&P downgraded, India`s outlook from stable to negative, making the investors cautious of the local growth story. The downgrade will increase the cost of funding for local companies and adding constrain to growth. The current account deficit stood at 4% of the GDP; while Fiscal deficit stood at 5.9% of the GDP for the fiscal year ended on March,2012.

The Deficit burden accounts on the back of sharp slowdown in growth, with growth expanding at just 6.1%. On top of all these challenges, uncertainty about the taxation of foreign investors has raised fears about slowing capital inflows and the changed outlook will hamper it further. Our economy is getting more reliant of the foreign flows, any further major outflows from the nation will make the situation worse. With liquidity crunch, RBI won`t be able to intervene much to ease the building pressure on the rupee. As shown by the surge in repo borrowings from the central bank, which has regularly surpassed 1 trillion rupees - well above RBI`s comfort levels. Any further dollar sale would add fuel to the burning fire, as the government has a heavy borrowing program of Rs 370000 crore via bonds in the fiscal first half year. The Intra-day range for the Rupee is seen between 52.38 - 52.60 levels against the dollar.

The Call money surged yesterday to 8.40%, after the S&P downgraded India`s outlook. It also added a bearish tone in the bond market. The Bond yield also pulled up to 8.63%. The 10 year yield can be seen in the range of 8.62-8.66%. The one month NDF is trading at 52.86 - 52.96 levels. The One year forward premium was at 303 paisa.

India Forex Advisors while commenting on the outlook said, ``The rupee maintains overall weakness as suggested in earlier reports. We expect a 1-3 months view of further weakness with certain dips of 50-100 paisa in between. We can expect a strong base of 50 to hold on a 3 months horizon with an upside target of 53-53.50 possible. Break of 53 could also push rupee higher to new highs. Importer cover on any opportunity close to 52.10-52.40. Exporters hold their Exposure with a stop loss of 52.20 levels and start covers only (partially depending on existing covers) with premiums above 52.50 levels.``

India Forex Advisors gave following outlook on other currencies, gold and crude oil:

EURUSD: The EUR/USD is currently trading at 1.3230 level. The currency`s rally against US dollar is on account of strong European indices and the decline in the Spanish bond yields. The ten year Spanish bond yields remain below 6 percent. The rally in Euro can also be attributed to weak US economics data. We will watch out for the German CPI numbers, which will be released today. Immediate support is seen at 1.3186 (55 day EMA), while the resistance comes at 1.3380 levels. Overall bearish target 1.30 and below. 1-3 months horizon bearish range 1.25-1.34. EUR/INR could be touching 70-71 on account of USD/INR strength.

GBP/USD: GBP is trading flat at 1.6171 levels. The British pound strengthened against both the U.S. dollar and the euro today despite weaker economic data. The UK economy shrinking by 0.2% in the first three months of 2012. The economy shrank by 0.3% in the fourth quarter of 2011 and expectations for the first quarter of 2012 were for an expansion of 0.1%. Looking ahead, Nationwide Consumer Confidence, CBI Realized Sales are due for the day. Support is seen at 1.6080 level, while immediate resistance is at 1.6270 levels (recent high). Exporters cover GBP/USD pair on up ticks. GBP/INR is at 85.04 levels. Medium bearish target can be seen near 1.5600 levels. 1-3 months bearish range 1.55-1.63 levels. Levels of 87 could be seen in GBP/INR due to strength in USD/INR pair.

USD/JPY: USD/JPY is trading at 81.16 levels. The Japanese yen held steady or weakened against all the major currencies. With no major data released yesterday. Japan`s central bank is set to increase stimulus measures as a rebound in the yen shows that the impact of a 10 trillion yen (USD 123 billion) expansion in asset purchases in February is fading. The Stimulus is expected to be around 5 trillion yen to 10 trillion yen. Support is seen at 80.80, while Resistance is at 81.47 level (21 day EMA). Bullish Target 1-3 months - 85 levels.

AUD/USD: The Australian dollar is trading at 1.0363 levels. Australia`s currency was positive on the back of rally in the asian stocks which boosted the demand for riskier assets. Also, the currency received some strength after the Fed chairman Bernanke stated that the US central bank has still kept the door open for further monetary stimulus if necessary.. An index of Australian leading economic indicators was unchanged in February after gaining 1 percent the prior month. Support is seen at around 1.0306 (recent low), while resistance is seen at 1.0420 level (50 day EMA). Target 1-3 months 1.0 (parity or below).

Gold: Gold is trading stable at 1646 levels. The Gold held above $1,644 after the U.S. Federal Reserve`s meeting. The U.S. monetary policy was `more or less in the right place` even though the central bank would not hesitate to launch another round of bond purchases if the economy were to weaken. Support is at 1624 level, whereas immediate resistance can be seen near 1,651 (21 day EMA). Overall look at a range of 1-3 months at 1,550-1,630 levels. Overall Target 1,550.

Oil: WTI Crude is trading at USD 103.96 levels. After the Fed meeting, US crude futures were seen steady when the Fed chairman said they were ready to help the economy if necessary. In the meanwhile, The world`s top oil exporter, Saudi Arabia, has increased its crude inventories to meet higher power demand this summer and partly to cover a possible global supply shortfall if tensions between Iran and the West escalate. Strong near term support is at 103 and resistance at 104.9. Overall range of 100-105 with bearish bias.

DI: US dollar index is trading at 79.06 levels. It is trading in red. The dovish comments drove the U.S. dollar lower, the reality is that QE3 is not an imminent risk. FED is open to the idea but a more drastic pullback in growth or the asset markets would be needed for it to become a reality. If the economy moves forward at its current pace, QE3 may not be necessary. Support is seen at 78.75 level. Resistance can be seen near 79.40 (55 day EMA). 1-3 months target of 81 -82 levels.

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