Sterling edges higher versus dollar, outpaces euro

Tom Tong17/Dec/2010Currency Updates

GBP

Sterling edged higher against the dollar and the euro on Thursday on robust retail sales data and as British inflation expectations continued to rise – though gains were limited by a mixed overall outlook for the economy.

The pound rose after UK retail sales figures for October were revised higher, while year-on-year sales for November were above forecast.

Consumer confidence however fell to a 20-month low in November, according to the Nationwide, almost completely reversing the rally in sentiment that took place from mid-2009. The index of sentiment fell by 7 points to 45, the lowest since March 2009, reflecting concerns about government cuts. The measure of expectations fell 9 points to 61, also a 20-month low.

In its latest Financial Stability Report, the Bank of England has said that although banks have improved their ability to absorb losses, the interconnectedness of the European banking system will amplify losses from peripheral economies. It added that although UK lenders have limited direct exposure to peripheral European debt, UK banks have significant exposure to French and German banks, whose banking systems are more heavily exposed.

EUR

The euro rose against the dollar for a second day as European Union leaders agreed to create a mechanism to contain future debt shocks and the European Central Bank armed itself with more capital.

The shared currency gained versus 14 of its 16 most-traded counterparts as a report today is forecast to show German business confidence held near a record. Against the trend, the EUR sunk to record lows against the Swiss Franc, which gained heavily yesterday against its major counterparts (0.2% against the EUR and 0.8% against the dollar).

The ECB said yesterday it will boost capital by 5 billion euros ($6.7 billion) to 10.76 billion euros, starting Dec. 29.

Demand for the euro was limited as EU divisions widened about how to prevent sovereign-debt problems from engulfing Portugal and Spain.

USD

The US dollar fell on Friday, struggling for support as a rapid rise in US bond yields ebbed, while Asian stocks clawed higher after two days of declines.

Benchmark 10-year US treasury yields held at 3.44 percent in Asia and futures rose after a push overnight towards a seven-month high close to 3.6 percent enticed bond buyers back into the market, confounding investors hoping for a trend to cling to in the final weeks of 2010.

Still, stocks in advanced markets were poised to keep a year-end rally going, even though Japanese equities unofficially closed marginally lower.

Market sentiment

Traders report a typical December, with high volatility and no trends. December’s reduced trading volumes and holidays typically cause whippy price action and make big bets difficult to hold for long.

In a statement concerning investor risk appetite, Koji Fukaya, chief currency strategist in Tokyo at Credit Suisse Group AG said today that “Risk sentiment remains firm, supporting higher-yielding currencies against developed nations’ currencies,” and further that “cross currencies should strengthen against the yen”.

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Written by Tom Tong

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