A Surge in Sovereign Debt Yields Weakens the Euro

The EUR/USD trader lower amid concerns about sovereign debt issues in Italy, Spain and Portugal. These fears triggered a move in sovereign yields not seen since 2010. As fear set in, global investors once again pressured global equity markets.

The explosion in periphery bond yields is just another sign that Europe is still vulnerable to a financial crisis. The worse the crisis gets, the more aggressive the European Central Bank will have to be with its quantitative easing plans. This will be bearish for the EUR/USD because QE tends to flood the market with cash.

 The dollar showed a little volatility against the Euro and British Pound after St. Louis Federal Reserve Bank President James Bullard said the Federal Reserve should consider delaying the end of is bond purchase program to halt the decline in inflation expectations.

Bullard added that although the U.S. economic fundamentals remain strong, the outlook for Europe may continue to create turmoil in the marketplace. Bullard said, “Inflation expectations are declining in the U.S. That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.”

Today, the U.S. government said the number of Americans filing unemployment claims last week dropped to a 14-year low. The number showed a decline of 23,000 from last week to 264,000. This was the lowest figure since 2000. U.S. industrial production rose 1.0 percent in September, versus expectations of 0.4 percent. Homebuilder confidence in October fell sharply after reaching a nine-year high last month.

The real story behind the market’s volatility today wasn’t the U.S. economic news but rather risk averse traders flocking to the U.S. Dollar.

The rise in the dollar also pressured gold futures. Crude oil futures weakened after the U.S. Energy Information Administration showed inventories rose by 8.9 million barrels, well above the estimate of a 2.3 million barrel increase.

Prices are expected to weaken further because of strong production in the U.S., Russia and Saudi Arabia. Russia needs to keep selling crude oil and raise cash and the Saudi’s along with other OPEC members are showing no signs of cutting production.

Today’s price action is all about volatility and risk aversion due to the developing sovereign debt issues in Italy, Spain and Portugal.