Investors focus on US fundamentals as treasury yields rise

Tom Tong09/Dec/2010Currency Updates

GBP

Sterling rose to a two-week high against the US dollar on Wednesday, boosted by news of a significant rise in industrial orders which was a further indication that the UK economic recovery is gaining momentum.

The Confederation of British Industry survey’s total order book balance unexpectedly jumped to -3 this month, the highest since June 2008, with export orders hitting a 15-year high as the sector benefited from a weaker pound.

The pound also gained versus the euro as the investors remained concerned about the Eurozone’s debt crisis. Focus is now on the latest Bank of England interest rate decision which is scheduled for 12:00 GMT.

EUR

The euro weakened against the dollar and pound during Wednesday amid on-going worries about Europe’s government debt crisis.

To add to the euro’s woes, German exports unexpectedly dropped in October as Europe’s sovereign debt crisis and a cooling global economy curbed demand. Austerity measures across the euro region are eroding demand for German goods in the country’s biggest export market.

USD

The dollar fell to a two week low versus the pound on Wednesday although faired better against its other most traded counterparts. Further dollar gains are likely in the near term, as treasury yields have spiked following a proposed extension of tax cuts that raised growth expectations for the US economy.

For the first time in weeks, Eurozone debt concerns were placed on the back burner as investors focused on US economic fundamentals in a thinning market. In some quarters it is believed tax cuts could lead to US GDP increasing by up to 2% in 2011. Such views have propelled 10-year US treasury yields to 3.295% – a level not seen since late June.

Higher yields tend to support the greenback as they reflect stronger growth. They also enhance the attractiveness of some dollar-denominated assets to investors.

Things to watch

AUD Employment Change figures were released this morning at 00:30 at 54.6k (forecast at 20.0k, previous at 36.9k) and Unemployment Rate (NOV) were released at the same time at 5.2% (forecast at 5.2%, previous at 5.4%).

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Written by Tom Tong

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