Euro rallies slightly but debt worries persist; markets eye ECB rate announcement

Tom Tong02/Dec/2010Currency Updates

GBP

Sterling slipped against a firmer euro on Wednesday as investors became concerned over the single currency ahead of an ECB policy meeting, while strong UK manufacturing data supported the pound versus the dollar. The UK manufacturing PMI headline index rose to 58.0 in November, showing the fastest employment growth since the survey began in 1992.

The numbers further diminish the chances of more quantitative easing (QE) from the Bank of England, with attention in the UK now moving to construction and services PMI surveys on Thursday and Friday, respectively. Other data showed British house prices fell for the fourth month in five in November. Consumer confidence weakened more than expected in November and people were the most downbeat about prospects for personal finances in almost two years.

USD

The US dollar traded steady against major opponents after the release of Federal Reserve’ Beige Book report on Wednesday. The economy continued to improve during the period from early/mid-October to mid-November, the Federal Reserve said Wednesday in the report, a compilation of anecdotal evidence on economic conditions from each of the twelve Fed districts.

While the report said economic activity in the Boston, Cleveland, Atlanta, Dallas, and San Francisco districts increased at a slight to modest pace, the New York, Richmond, Chicago, Minneapolis, and Kansas City districts saw a somewhat stronger pace of economic activity.

The Fed noted that manufacturing activity continued to expand in almost all districts, with only New York reporting that manufacturing activity had weakened. Relatively strong growth was seen in metal fabrication and the automotive industries.

EUR

The euro rallied slightly from a recent plunge on Wednesday as pressure on Spain eased up but the Eurozone debt crisis still dominated sentiment with Portugal being put on credit watch. Ratings agency Standard & Poor’s placed Portugal on a credit watch because of “increased risks to the government’s creditworthiness” as Europe’s debt woes deepened. S&P on Tuesday said increased risks came from the Portuguese government not doing enough to enact “growth-enhancing reforms” and from proposed changes to EU rules that could mean private bondholders are last in line to be paid back.

The European Central Bank will hold its key interest rate today and all eyes are likely to be on any probable measures the central bank will take to arrest Europe’s spreading sovereign debt worries.

Just as in the previous months, economists do not expect any change in the key interest rate at the last Governing Council meeting of the year. The rate-setting body, led by President Jean-Claude Trichet is most likely to leave the key interest rate at a record low of 1% for a nineteenth consecutive month.

The last change in the interest rate was in May 2009, when the bank cut the rate by 25 basis points to the current level of 1%. The bank had lowered the key interest rate by a total of three and a quarter percentage points since early October 2008.

Elsewhere

The Swiss economy grew at a slightly slower pace in the third quarter, but growth stayed well above market expectations, spurred by domestic demand.

Gross domestic product rose 0.7% sequentially in the third quarter following a downwardly revised 0.8% growth in the second quarter, the State Secretariat for Economic Affairs SECO said Thursday. However, the economy expanded faster than the expected 0.5% increase.

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Written by Tom Tong

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