EU bail-out fears cool amid successful Portugal and Spain bond auctions

Tom Tong20/Jan/2011Currency Updates

GBP

Jobless claims in the UK decreased for the third month in December, suggesting a slight improvement in the labour market. Earnings growth remained subdued, easing the pressure on the central bank. Meanwhile, unemployment increased notably during the three months to November.

Central banks’ aim is not always to lower inflation, but instead to ensure price stability, Bank of England policymaker Adam Posen said on Wednesday. Posen had been speaking about European monetary union at Aston University in central England and an audience member asked him about the claim that major central banks’ quantitative easing since the financial crisis had triggered inflation.

EUR

The euro held its recent gains against other major currencies on Wednesday amid mounting evidence that the monetary union will survive a prolonged sovereign debt crisis. It appears for now that Spain and Portugal will not join Greece and Ireland in accepting debt relief from neighbours and the International Monetary Fund. The Iberians conducted successful bond auctions earlier this week, allowing central bankers to turn attention to fighting inflation in the Eurozone.

While US policy makers are expected to maintain accommodative monetary policy in 2011, the inflation fighters at the ECB will likely tighten if prices continue to rise above their 2 percent target.

USD

The dollar fell broadly on Wednesday, losing further ground against the euro and the yen although it did come back up towards parity versus its Canadian counterpart.

While the Commerce Department released a report on Wednesday showing a steeper than expected drop in housing starts in the month of December, the report showed that housing starts fell 4.3 percent to an annual rate of 529,000 in December from the revised November estimate of 553,000. Economists had expected housing starts to edge down to 550,000 from the 555,000 originally reported for the previous month.

Meanwhile, the Commerce Department also said that building permits, an indicator of future housing demand, jumped 16.7 percent to an annual rate of 635,000 from the revised November rate of 544,000. Building permits had been expected to show a more modest increase to 560,000.

Elsewhere

Brazil’s central bank has raised its key interest rate to 11.25% in a bid to cool inflation in one of the world’s fastest growing economies. The rise, from 10.75%, is the first under President Dilma Rousseff and central bank head Alexandre Tombini, both of whom took office this month. Inflation was 5.91% last year and is forecast to remain above 5% in 2011.

China’s economy ended 2010 on a high, as growth in the last three months of the year blew past expectations, despite numerous tightening measures being brought into effect. Gross domestic product grew 9.8% between October and December compared to the same period a year ago, higher than expectations for a 9.4% increase.

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Written by Tom Tong

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