US dollar surged to a fresh two month high today, breaking marginally under the key 1.3000 levels against the Euro and extending its latest bounce. Widening Spanish debt spreads are having a negative impact on the risk sentiments and given the mega sell off in gold and the rally in the US dollar, the current setback looks much more like a throwback to the late 2011 trading environment. The important thing to realize is that the Eurozone PIIGS worries are resurfacing just at the time when there is a possible shift in the US growth momentum, as evident by the latest non-farm payrolls data. This double whammy could see global risky assets suffer more in near term as the strong gains built up in first two months of the year are still very in place and a full blown sell off has not taken place in markets despite the moderation witnessed in April. The Spanish debt spreads against the benchmark German bunds soared yet again today and Euro slumped for a second straight day against the US dollar, extending its slide from a 10 session high last week. Meanwhile, China noted on Saturday that it would allow a 1% move from the government-set daily parity rate, up from 0.5% previously. There has been some talk of the Fed injecting addiitonal liquidity in the financial system while its Quantitative Easing channel but no clear evidence of the same has emerged so far on that front. The slugish growth prospects in major emerging economies and lackhlusutre undertone in equities has moslty made the current investment climate rather uncertain. The gains in US dollar are expected to extend further into near term in case if the break under 1.3000 levels continues.
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