Dollar sinks as appetite for the safe haven currency falters

Tom Tong13/Jan/2011Currency Updates

GBP

Sterling initially fell heavily on Wednesday on the back of Fed’s US Beige Book report showing the US economy grew in the final months of 2010. However, the fall was short-lived as the afternoon session saw the EU show strong support for Portugal, after numbers showed Britain’s trade deficit widening to 8.736 billion pounds from October’s 8.59 billion and beating expectations of 8.33 billion. This was the biggest trade deficit since records began in January 1980.

The BoE started a two-day meeting on Wednesday and rising inflation expectations are likely to dominate the Monetary Policy Committee meeting. The decision will be announced on Thursday, although there is very little chance of a rate increase.

EUR

The euro stabilised on Wednesday after a successful Portuguese bond auction eased fears over Europe’s sovereign debt problems. Portugal was able to sell 1.25 billion euros in government debt, with interest rates falling slightly on its longer term bonds. With the European Central Bank likely involved in snapping up bonds, the borrowing cost on its 10-year bonds slipped slightly to 6.717 from 6.8 percent at its previous auction.

This is all very positive after reports surfaced earlier this week suggesting that Germany and France were urging Lisbon to work out a rescue plan, but talk of a bailout is likely to subside for now.

The world will continue to watch Europe today as Spain and Italy, also struggling to attract investment at sustainable rates, will tap the bond markets, just as the European Central Bank makes its next interest rate announcement. Analysts expect the sales to go without a major hitch, but at elevated costs.

USD

The dollar drifted lower against a basket of major counterparts on Wednesday, as a successful bond auction for Portugal boosted appetite for riskier assets.

The Fed’s Beige Book said that the US economy strengthened in the final months of 2010, as the jobs picture brightened across the country. The report released Wednesday afternoon stated the twelve Fed districts generally reported that conditions were better in the manufacturing, retail, and non-financial services sectors than in the financial services or real estate sectors.

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Written by Tom Tong

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