UMich Revisions Make the Dollar Even More Attractive

While most of the major currencies are unchanged against the U.S. dollar this morning, it is worth noting that the EUR/USD broke below 1.25 at the start of the North American trading session. The lack of major U.S. and European economic data ahead of a long holiday weekend should have meant more stability than volatility in the financial markets. Unfortunately rumors, speculation and ongoing concerns about Greece leaving the euro has left investors nervous about buying and selling the single currency. With a small but serious risk of European governments taking advantage of the U.S.' long weekend to make a major announcement, we are also seeing profit taking and short covering in euros which explains why the currency pair snapped back so quickly when it broke below 1.25. Spanish 10 year bond yields are also up 13bp this morning which indicate that contagion remains a concern.

Risk appetite received a bit of a boost from the revisions to the May University of Michigan Consumer Confidence index. According to the survey, Americans were even more optimistic than initially reported. The UMich index was revised up to 79.3 from 77.8 compared to a reading of 76.4 in April. While the momentum in the U.S. economy remains sluggish, confidence improved for the ninth consecutive month. Interestingly enough, current conditions were revised lower but the economic outlook was revised higher. Another piece of positive data makes parking money in the dollar even more attractive and means that the Fed won't need to introduce another round of easing for the time being. Fed President Dudley, one of the more dovish members of the FOMC will be speaking later this afternoon and he is expected to repeat his view that a case could be made for further easing but we believe the Fed won't be pulling the trigger unless Europe's problems set off another 5 to 7 percent slide in the Dow.