Market focus remains on euro as S&P downgrades Ireland’s credit rating
25/Nov/2010 • Currency Updates•
Sterling continued its losses against the US dollar after the Office for National Statistics (ONS) reported no change to the third-quarter UK GDP figures.
The British economy grew by 0.8% in the July to September period, in line with expectations, and the year-on-year figure remained unchanged at 2.8%.
UK officials remain aware that further problems in the Eurozone could yet adversely affect the UK, a calculation that has underpinned Chancellor George Osborne’s decision to lend embattled Ireland £7 billion. The ONS also revealed that business investment fell by 0.2% from the previous quarter, with the fall being driven by a 15.8% slump in investment among public non-manufacturing companies. However, the year-on-year figure is 4.6% higher, suggesting that growth is continuing in the UK manufacturing sector.
The dollar continued to drive higher versus the euro on Wednesday, improving to a new 2-month high.
New home sales in the US unexpectedly showed a steep drop in the month of October, according to a report released by the Commerce Department on Wednesday, with new home sales pulling back near the record low levels seen in the summer.
The Commerce Department said new home sales fell 8.1% to an annual rate of 283,000 in October from the revised September rate of 308,000. Economists had been expecting new home sales to rise to an annual rate of 314,000 from the 307,000 originally reported for the previous month.
Analysts said Eurozone worries eclipsed concerns about tensions between North and South Korea, which exchanged artillery fire a day ago. Most believed the clash would not escalate, though a North Korean statement on Wednesday said the South’s action was driving the peninsula to the brink of war.
International rating agency Standard & Poor’s downgraded the Irish Republic’s sovereign credit rating on Tuesday, citing the country’s bigger than expected borrowing requirements to finance its troubled banking system. The credit rating was cut by two notches to A from AA- and the short-term rating was lowered by one notch to A-1 from A-1+. Both were placed on CreditWatch with negative implications, suggesting that more downgrades are likely.
The euro also dropped as the European Union urged Ireland to adopt an austerity budget on time to unlock the promised EU/IMF funding, in response to a deepening political crisis that could derail the financial rescue to recapitalise the country’s banks and fund its public finances. Ireland on Sunday asked for a massive loan from the European Union and the International Monetary Fund, as Greece did in May. Investors remain anxious that other countries in Europe may also have to seek aid.
The biggest concern for Europe watchers is Spain, the fourth-biggest economy in the 16-country Eurozone and one that has struggled with a housing collapse and weak banks.
Elsewhere, Eurozone industrial new orders fell more than expected in September as demand for all sorts of goods declined. Despite the drop, the sector is expected to contribute to the currency bloc’s economic growth. New orders fell 3.8% month-on-month following a revised 5.1% increase in August. Economists had forecast a 2.5% decline.