Dollar and pound advance as bad news hits euro

Both the dollar and the pound advanced against the euro today as a story in Britain's Daily Telegraph questioned the health of the German banking system. The euro fell from its five month high against the dollar to below $1.39.

In addition to bad news about German banks, euro zone economic data showed weakening as well. Germany's economy shrank in the first quarter at its fastest pace since reunification in 1990. Also, euro zone industrial orders fell in March.

Hearing all the bad news, investors grabbed their profits from the recent run up in the euro and started buying back dollars and government bonds. The news of North Korea's missile test on Tuesday, also had investors shedding holdings in stocks and commodities and heading to the safety of dollars and bonds.

"There is some profit taking there ... the euro/dollar rally of last week was a bit excessive," David Powell, G10 currency strategist at Bank of America-Merrill Lynch in London, told Reuters. Powell indicated the bad news for German banks wasn't really new information, but it encouraged traders to book their profits.

The Daily Telegraph reported that Germany's financial regulator warned toxic debt held by Germany's banks would blow up "like a grenade" unless they take advantage of government bad-bank plans. The regulator estimates that German banks have bad assets of around 200 billion euros ($280 billion) on the books.

This bad news helped to prop up both the dollar and the pound. The pound, specifically, needed the boost following its fall last week when the S&P cut its rating outlook. The dollar will be tested later this week when the U.S. auctions $101 billion in Treasury notes. Two-year notes will be sold later today. Five-year notes will be sold on Wednesday and seven-year paper will be sold on Thursday. Analysts don't expect problems because it is not in the interest of major reserve holders to disrupt the sale of notes.

Lita Epstein has written more than 25 books, including the Complete Idiot's Guide to Foreign Currency Trading.

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