Ireland votes in austerity measures by narrow margin; markets remain unconvinced

Tom Tong08/Dec/2010Currency Updates

GBP

The pound climbed to a 5 day high against the euro on Tuesday, with investors seeing strength in the sterling over lingering concerns over the USD and euro.

On the economic front, the UK economy expanded at a faster pace in the three-month ending November, according to the monthly estimates from the National Institute of Economic and Social Research. The gross domestic product grew 0.6% sequentially during the three months through November, slightly faster than the 0.5% growth recorded during the August to October period.

Earlier in the day, the Office for National Statistics said that UK industrial output dipped 0.2% in October from September. This follows a 0.4% rise in September. Economists were expecting a monthly growth of 0.3%.

EUR

The euro climbed against the dollar on Tuesday on expectations that Ireland will pass an austerity budget later in the day, but the single currency’s strength will likely be transitory as structural weaknesses in the Eurozone persist.

The euro remained vulnerable after Eurozone policymakers failed to come up with new policies to tackle the region’s debt crisis. The Irish government voted in its unpopular austerity budget for 2011 by a narrow margin. Dublin needs to dramatically cut costs as a condition of getting bailout loans from the International Monetary Fund and its European neighbours. As the Irish parliament discussed the budget cuts, the European finance ministers decided not to increase the size of an emergency fund designed to prevent a debt crisis from spreading beyond Spain and Portugal.

USD

The dollar steadied after some initial weakness on Tuesday, supported by hopes that the extension of tax cuts and unemployment benefits will help sustain the fragile US recovery. Concerns about US deficits were put on the back-burner as President Barak Obama agreed to keep in place the Bush-era tax policies in return for a 13-month extension of unemployment benefits. Benchmark US Treasury yields hit their highest since July as the proposed tax deal sparked concerns over the government’s ability to service its debt burden. Moody’s Investors Service said it is worried the extension of tax cuts could become permanent, hurting US finances and credit ratings in the long run.

Despite the rise in the dollar, some analysts said deteriorating US fiscal positions could pose risks to the currency in the medium to long term. In recent years, dollar bears have been worried about the ability of the United States to continue funding its large deficits if foreign investors lose faith in US assets.

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Written by Tom Tong

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