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Dollar Rockets To Fresh 16-Month High Versus Euro; Euro Zone Downgrades Coming

January 14, 2012

The dollar surged to a fresh 16-month high versus the euro on Friday, amid numerous reports suggesting that S&P will downgrade 15 euro zone nations due to exposure to Italian, Greek, and Spanish debt.

France’s finance minister just confirmed that the ratings agency is lowering the French credit rating by one notch.

In December, S&P put most of the single currency bloc on negative creditwatch, citing concerns about "deepening political, financial and monetary problems with the European economic and monetary union."

"There is talk now that Italy, Spain and Portugal will get a 2 notch downgrade. If so, Italy’s credit rating will be BBB+, two notches below Moody’s and 3 below Fitch. Spain’s would be A, one notch below Moody’s and two below Fitch," said Peter Boockvar, Managing Direct at Miller Tabak. "Portugal’s rating would go to BB, junk and that would put them in line with Moody’s and one notch below Fitch."

The news overshadowed a slew of economic data from the U.S., including a strong reading on consumer sentiment.

The dollar rose two cents to $1.2625 versus the euro, its highest since September 2010. A successful Italian debt auction gave the euro an early boost.

The buck hit an 18-month peak of $1.5232 versus the sterling, and edged up to C$1.0240 versus Canada’s loonie.

Consumer sentiment in the U.S. has seen a significant improvement in the month of January, according to a report released by Reuters and the University of Michigan on Friday, with the consumer sentiment index rising by much more than anticipated.

The report showed that the consumer sentiment index jumped to 74.0 in January from the final December reading of 69.9. Economists had been expecting the index to edge up to a reading of 71.5.

With prices for U.S. fuel imports pulling back in December after showing a sharp increase in the previous month, the Labor Department released a report on Friday showing a modest drop in overall import prices.

Export prices also fell during the month due in part to a notable decrease in prices for agricultural exports. The Labor Department said imports prices edged down by 0.1 percent in December after rising by an upwardly revised 0.8 percent in November.

Reversing a drop in October, the U.S. trade deficit saw a notable increase in November, according to figures released Friday by the Commerce Department. U.S. exports fell by 0.9 percent to a level of $177.8 billion, while imports rose by 1.3 percent to a level of $225.6 billion, according to the report.

That put the trade deficit at $47.8 billion, a 10.4 percent increase from October’s revised level of $43.3 billion.


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