Euro strengthens as Ireland bailout takes form

Tom Tong19/Nov/2010Currency Updates

GBP

Sterling rose against the dollar on Thursday, helped by a recovery in UK retail sales and factory orders while it also rode on the back of euro gains on anticipation that Ireland will get aid to ease its debt crisis.

British retail sales rose 0.5 percent in October, recovering from a 0.2 percent fall the previous month, while a survey showed British factory orders fell at a slower-than-expected pace in November

There was some less positive news on the UK, however, with government borrowing hitting another record high, while the Office for Budget Responsibility warned a planned rise in value added tax would shave 0.3 percent off 2011/12 economic growth.

EUR

The euro advanced strongly against the US dollar as investors increasingly began to expect an Irish surrender in the face of EU pressure. Comments from the governor of the Irish Central Bank, Brian Honohan indicated that Dublin would receive a bailout loan from the EU and IMF, in order to shore up the country’s battered financial sector. A deal could mean that the contagion will not spread across other Eurozone economies, such as Portugal and Spain, as some have feared. Governor Honohan is the first Irish official to publicly say that the country will require aid, other officials having strenuously denied that Ireland needed the money.

However, just as the euro seems to be snatching victory from the jaws of defeat in one area, another problem looks set to flare up again. Greece, who received a bailout earlier this year, may yet fail to meet the deficit-cutting requirement laid down in that agreement. Athens has to meet a target of cutting the deficit from 9.4% of GDP to 7% by the end of 2010. If it fails, then it does not qualify to receive a further tranche of bailout money. If this starts to be a recurring pattern, Greece’s financial stability could be called into question and the EU may find that a problem it thought had gone away still has the potential to cause major disruption.

USD

All eyes were on Federal Reserve Chairman Ben S. Bernanke yesterday as he took his defence of the US Central Bank’s monetary stimulus abroad, saying it will aid the world economy, and implicitly criticized China for keeping its currency weak.

A strong reading in the Philly Fed PMI yesterday led risk higher, as sentiment in US equity markets improved and riskier currencies saw gains. The reading eased the fear of a major setback in the ISM index that built up after the dismal Empire index released earlier this week. Also, initial jobless claims remained below 440,000 for the second week in a row, suggesting a continued, but moderate improvement in the US labour market.

Things to watch

German Producer Prices (MoM) (OCT) was released at 07:00 at 0.4% (forecast at 0.3%, previous at 0.3%) and (YoY) (OCT) was also released at 07:00 at 4.3% (forecast at 4.1%, previous at 3.9%).

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Written by Tom Tong

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