Merkel's Call to Action Boosts the Euro at Year End

A call to unity from German Chancellor Angela Merkel in a New Year speech to her nation is helping drive the single European currency higher as 2010 draws to a close. Still, the dollar will end the year higher versus the euro having taken advantage of ongoing sovereign debt crises that have plagued the region. Nevertheless it is the dollar that has once again weakened on the final day of the year on estimates that 2011 will build on the recently-found economic momentum that continues to shape economic data readings.

U.S. Dollar - The dollar basket is trading at a two-week low as the euro rebounds. The efflux away from the dollar continues to be driven by rising confidence in the Asian region where economies have prospered as the Chinese economy drives ahead. The Peoples Bank once again set the yuan's daily reference rate higher and given the permitted daily trading bands, the currency strengthened to beneath Rmb6.60 per dollar for the first time in 17 years when the peg to the dollar was abandoned. China is using currency strength to combat inflationary pressures and in so doing is creating demand for regional currencies whose economies are bulging and where widening interest rate differentials against the dollar provide impetus to buy into those currencies. Investors have reached a point now where positive U.S. data is invigorating confidence in racier prospects around the world rather than reinforcing the appeal of the dollar itself. Yesterday's Chicago ISM report showed business expansion at the strongest in 22 years.

Japanese yen - Japanese markets are closed for the New Year holiday and as they celebrate, the yen is pushing higher against the dollar to ¥81.30, which is the highest it's been since November 9. Whether the yen's strength will usher further action from the Bank of Japan or not is another matter. One could argue that with the wave of demand for Asian units in general, the move in the yen is scarcely a one-sided move. Nevertheless, exporters facing loss of demand for the rising price of their goods abroad won't be celebrating in early 2011 at this rate.

Euro - Later today Chancellor Merkel will deliver a speech to her nation in which she comes to the defense of the euro, calling it the "foundation of Germany's economy." Merkel explicitly states that her European cohorts must make moves to bolster the value of the euro. I dare say that if she's successful in pumping the euro to $1.50 in the first quarter she'll be demanding the U.S. take steps to alleviate pressure on exporters in the Eurozone. However, her intention is well-founded as she attempts to foster a permanent solution amongst leaders beyond the 2013 expiration of the emergency fund established earlier in 2010. Germany is the largest contributor to the fund and doesn't want to enlarge the fund, but find a better solution. Mrs. Merkel calls the euro "far more than a currency," claiming that it is "the foundation of our wealth." The single currency today approached $1.3400 as she rattled her sword and spelled out her determination for spearheading a rescue plan for 2011. Investors drove up the unit overlooking the fact that several Eurozone governments remain hampered by the straightjackets they have found themselves in due to fiscal profligacy or as a result of the impact of financial meltdown.

British pound - The pound has been staggering like the proverbial drunken sailor all week - one can never tell from day-to-day which direction it will take next. In omnipresent thin markets sterling rallied sharply following a surprise gain for home prices in December. The Nationwide house price index surprised observers with its first monthly gain in seven months adding 0.4% after a November decline of 0.3%. Home prices remain 0.4% higher than at the end of 2009.

Aussie dollar - The Aussie spent the session just chilling by the pool and didn't even bother to test earlier in the week highs. The Aussie ends the year as the second best performing currency against the dollar (after the yen) and closes at around $1.0175.

Canadian dollar - The Canadian dollar spent three days testing the waters at around parity with the greenback before investors decided they liked the temperature and could wade deeper. To end the year the Canadian dollar has accelerated to buy $1.0025. Once again the story has more to do with an improving confidence in the U.S. economy with the Canadian unit feeling the tailwinds of its inherent mineral and material wealth.