Middle East troubles sees dollar dip versus sterling and euro

Tom Tong18/Feb/2011Currency Updates

Overview:

The main theme in the market on Thursday was dollar weakness against both the euro and sterling. The dollar dipped across the board as an overnight escalation of tension throughout the Middle East seemed to occur in both Bahrain and Yemen. The risk posed to fossil fuel commodities kicked in as a driver for dollar weakness. By 10am the dollar had dipped by over 0.5% against both the euro and the pound. In the afternoon weak US consumer confidence data did little to help the greenback out. In terms of data the main market focus will be on the month on month UK retail sales this morning, and on Ben Bernanke’s speech in the afternoon.

GBP

Sterling remained relatively flat against the euro whilst gaining ground against the dollar. The pound appears to be buoyed by general market expectations that interest rates are going to have to be hiked later this year to cap inflation. This has given some respite against the effect of this week’s negative employment data and higher than expected UK inflation. Although the UK economy starting to smell of ‘stagflation’ in the UK (stagnant growth along with aggressive inflation), current global macroeconomic factors seem to be offsetting any real negative pressure on the pound. The pound finished yesterday’s session unchanged against the euro and up 0.6% against the dollar.

EUR

The main factor affecting the euro yesterday was the latest Spanish bond auction. This raised over €2 billion in 10 Year bonds with the yield dropping to 5.7%. The liquidity in European debt markets seems to have halted the short term risks posed by the Sovereign debt crisis. The euro remained relatively flat against sterling and made gains of over 0.5% against a vulnerable dollar.

USD

The dollar suffered losses across the board on the back of risks posed to oil based commodities due to the current wave of discontent spreading throughout the Middle East. Further damage to dollar sentiment occurred due poor Consumer Confidence data in the afternoon. The main driver for dollar movements today will be Ben Bernanke’s speech. The market will look for clues as to what is to come with regards to the Federal Reserve’s likely path on monetary policy. The dollar was down by over 0.5% against both the pound and the euro. With market currently trading towards the higher end of its recent range against the pound (1.54-1.62), the value of hedging dollar exposures has scope to increase.

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Written by Tom Tong

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