Dollar strengthens versus sterling and euro over QE2 uncertainty

Tom Tong28/Oct/2010Currency Updates

GBP

The pound trimmed back gains made against the US dollar on Tuesday as speculation swept through the market that the Federal Reserve will buy less debt for quantitative easing than traders initially anticipated.

Following on from Tuesday’s positive GDP figures, the pound was able to sustain the gains made against the euro. On an extremely light day of macroeconomic data releases for the UK attention now turns to next week’s PMI Manufacturing data coupled with the Bank of England’s interest rate and asset purchase decisions.

EUR

The euro fell against the pound and US dollar on Wednesday after Greece said tax revenue is falling short of a government goal and talks on Portugal’s 2011 budget broke down. This fall was in contrast to ECB policymaker Yves Mersch’s statement on Tuesday, which alluded to the fact that ECB staff could raise growth forecasts when they are updated in December, as sentiment indicators for Germany and the Eurozone have largely been better than forecast.

Recent data releases have shown Germany’s headline unadjusted jobless total to fall in October to its lowest since October 1992. But there were also figures showing loan growth was still sluggish, underlining the problems companies, consumers and authorities face as they head into a year of eye-watering cuts in public spending in many countries.

USD

The dollar advanced broadly as investors cut short positions in the currency on speculation that the US Federal Reserve would take less aggressive action to stimulate the economy at its policy meeting next week.

Reports suggested that the Fed would take a gradualist approach to further quantitative easing, making bond purchases of a few hundred billion dollars over several months. This contrasted with expectations that the Fed would make initial bond purchases worth at least $500bn.

The dollar recovered some of its losses versus the pound through Wednesday trading while also hitting a two-week high against the yen and a one-week peak versus the euro.

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Written by Tom Tong

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