The dollar is finding friends, as it always does when the world looks a little shaky.
What would have been a quiet holiday week for markets has been hijacked by global events. North Korea's firing of artillery on a South Korean island early Tuesday, together with concerns about a contagion spreading across peripheral Europe, weighed on global risk markets and sent investors into safety plays, like the U.S. dollar.
The dollar gained 1.9 percent Tuesday to a two-month high against the euro, which was at $1.3370. The dollar index gained 1.2 percent. Only the yen was a bit higher against the greenback, and it was only slightly changed.
Spreads on the debt of Europe's weakest members widened dramatically against the German bund. The Dow fell 142 points, or 1.3 percent to 11,036, and the S&P 500 was down 17, or 1.4 percent to 1180. Buyers also flocked into Treasurys but the auction of $35 billion in 5-year notes was sloppier than expected. The yield on the 10-year fell to 2.764, its lowest level in 10 days.
"As long as these headlines are coming out, we're (stocks are) going to be pressured because people are not going to want to do anything," said Peter McCorry of Keefe Bruyette's equities trading desk.
Traders are watching both situations Wednesday, as well as a heavy U.S. economic calendar. The Irish government is expected to release a long awaited four-year budget plan, which would include controversial austerity measures such as lowering the country's minimum wage and cutting thousands of public sector jobs. Meanwhile, the government is in disarray as Irish Prime Minster Brian Cowen resisted calls to resign.
Ireland must reach abudget agreement in order to receive bailout funds totaling tens of billions of euros. German Chancellor Angela Merkel also spooked markets when she said Ireland's crisis was very "worrying" for the region and that it faces a "serious situation as far as the situation with the euro is concerned." Late Tuesday, Standard and Poor's cut Ireland's long-term sovereign credit ratings to A from AA-.
"The longer term question is whether Portugal is in the swamp," said Alan Ruskin, Deutsche Bank head of G-10 currency strategy. Traders have been speculating that Portugal could soon face its own problems, and the big fear is that much larger Spain could also run into trouble.
"A lot of this has led to liquidation of the some of the long euros positions that were revolving around QE (quantitative easing). It's a complete reversal. It's been a little bit of a washout in short dollar positions, first in Asia, then In Europe.
"I think the Asia story in general is one I've seen played out before and usually, these types of military events have a very short-lived impact on the currency market unless its going to turn into some full blown war, which I don't think anyone anticipates," Ruskin said.
Ruskin said he expects pressure to remain on the euro and that investors will sell on up ticks. "My guess is it can't keep up with this kind of a pace. I would anticipate we would see some let up in news form Ireland," he said.
Ashraf Laidi, chief market strategist at CMC Markets, said in a note that a euro close below its 55-day moving average of $1.3480 would mean the next next level in play would be $1.3320, then $1.3250. "Yen has always sold off during Korean tensions, but the broadening market sell off is now lending it support," Laidi wrote.
As U.S. markets focused on overseas events, the insider trading probe showed signs of widening. SAC Capital, Janus Capital and Wellington Management all were reported to have received inquiries from investigators.
Economic data expected Wednesday includes weekly jobless claims, durable goods and personal income and spending, all released at 8:30 a.m. Consumer sentiment is issued at 9:55 a.m. and new home sales are released at 10 a.m.
Gold rose, but other commodities sank. Oil sometimes rises in the face of global conflicts, but it fell nearly a percent Tuesday. It was at $80.97 per barrel.
"The traditional safe havens are at work, but with energy, there's more of a concern about what this does to the global economy, economic activity and demand," said John Kilduff of Again Capital.
"Given the neighborhood this is happening in, it's more of a demand fear," he said.
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