Dollar Sold off as UN Called for More Stable Reserve System
Dollar is sold off sharply today as UN called to ditch it as global reserve currency. In addition, funds are flowing back from dollar and gold to Euro as fear on Eurozone funding pressure eased. EUR/USD jumped sharply and broke 1.2466 resistance to resume the rebound started at 1.1875. Gold dived -3% to below 1210 and is setting its site on 1200 psychological level. Gold on Euro dropped -4.7% to below 970. Stocks were generally lower on another round of poor data from US. Yen was boosted higher against the greenback and commodity currencies but weakened against European majors.
The UN Department of Economic and Social Affairs said that the dollar is an unreliable international currency and should be replaced by a more stable system. The UN backs a proposal to replace the greenback with a basket of currencies in order to provide more stability in the global financial system. IMF reported that dollar's share of global reserve dropped from 62.14% to 61.54% in Q1. Euro's share also dropped from 27.3% to 27.19%. Pound's share rose from 4.28% to 4.34%. Yen's share rose from 3.01% to 3.14%.
ECB announced g to grant 78 banks EUR 111.2b of funds for six days to assist them in coping with expiry of the 12 month loan which totals EUR 442b. In addition, Spain managed to sell EUR 3.5b of five-year bonds today at bid to cover ratio of 1.7. This suggests that demand was sill solid even though Moody's said yesterday that Spain's rating is under review.
Equity markets were hit by another batch of poor data from US with DOW dropped to as low as 9621 while S&P 500 dropped to as low as 1010.91. ISM manufacturing index dropped much more than expected to 56.2 in June. Employment component dropped from 59.8 to 57.8. Pending home sales dropped sharply by -30% mom in May. Construction spending dropped -0.2% mom in May. Initial jobless claims remained elevated at 472k. Japanese yen was sharply higher against dollar and commodity currencies as global stock markets fell.
Other data released today saw UK PMI manufacturing dropped to 57.5 in June. Eurozone PMI manufacturing was left revised at 55.6 in June. Swiss SVME PMI dropped to 65.7 in June. China manufacturing PMI dropped more than expected to 52.1 in June, adding to sign that China's fast growing economy is cooling. Australian retail sales rose less than expected by 0.2% mom in May while building approvals unexpectedly dropped -6.6% in May. Japanese Tankan large manufacturers index turned positive to +1 in Q2 while non-manufacturing index improved to -5.
Dollar index's break of 85.09 support confirms that whole fall from 88.70 has resumed. Such decline is viewed as a correction in the whole medium term up trend from 74.19 and should now be targeting a test on trend line support (now at 83.35).
Gold's sharp fall today is taken as a sign of medium term reversal. That is, whole rally from 2008 low of 681 might be finished at 1266.5 already. Though, we'll still need sustained trading below 55 days EMA (now at 1207) to confirm. In such case, we would be looking at deep fall to 1044.5 cluster support (38.2% retracement of 681 to 1266.5 at 1042.8). Also, note that recent strength in gold was driven by fund flow from Euro, not from dollar. Hence, we saw some positive correlation in gold and dollar recently. Having said that , we'd be alerted on whether reversal in gold would provide more support to Euro than dollar going forward.