Periphery fears drag euro and sterling down against the dollar

Tom Tong10/May/2011Currency Updates

GBP

The pound made gains against a shaky euro yesterday but was dragged down against the dollar due to the euro fall. Sterling dropped to a low not seen in almost three weeks against the greenback as news of the Greek debt downgrade caused investors to finally refocus on the peripheral Eurozone debt concerns. The pound dropped by over 0.6% yesterday and made further losses early this morning. For technical analysts the move below the 55 day moving average suggests there could be room for further downward re adjustment towards the March low. Sterling is set to remain under pressure against the dollar as the string of soft data out of the UK last week has meant that the BoE is likely to downgrade their GDP and growth forecasts on Wednesday. The soft data has also meant that the BoE is unlikely to raise interest rates this year with the markets now not anticipating an increase until the beginning of 2012. However, the pounds performance against the euro stands in contrast as the woes in Greece have made a real impact on the strength of the single currency. Sterling moved up significantly against the euro and regained some of the ground lost over recent weeks.

USD

The dollar managed to continue its recent turnaround yesterday as it made good gains against both the euro and the pound as the market began to refocus on the sovereign debt issues in Europe as Greece had its rating downgraded further. The dollar has benefitted from speculation that Greece may leave the Eurozone, a scenario that would cause huge uncertainty for the euro project, as well as the stronger than anticipated job data that came out of the US at the end of last week. The change in fortunes is clear when you look at the dollar index, which rose to 75.158 yesterday.

Politicians in Washington were lobbying China to further unpeg the yuan yesterday as the country’s trade surplus jumped to 11.4 billion for April and exports hit record levels. The theme that we saw earlier in the year is returning as the US calls for a stronger international unit to help them combat China’s currency control. It is claimed the Chinese policy gives its exporters an unfair trade advantage by making their products artificially cheap. Although the yuan has strengthened five percent over the last year the move is not reflective of the true value of the currency with some calling for a move of at least 30% more. The only significant data prints today comes out of the US with the import price index and wholesale inventory figures printing this afternoon.

EUR

The euro dropped off against its most traded counterpart’s yesterday as the rating agency Standard and Poor’s, followed by Moody’s later in the day, downgraded Greece’s beleaguered credit rating. The rating was already nearing junk status but was officially downgraded from B to BB-.  The downgrade came as fears mounted that the nation would require significant debt restructuring over the coming months in order to stay solvent and meet its obligations from its bail-out last summer. The move by the rating agencies was confirmed after top Eurozone policymakers finally accepted that Greece will need a second bailout package to avert a full overhaul of its debt obligations. Investor concern was not limited to Greece as the EU conceded that it was also considering altering the rates in Ireland’s rescue package in order to avoid more possible defaults. Elsewhere, investor concerns over Portugal’s public finances and heavy debt burden have squeezed the country’s banks out of the interbank market for loans and left them dependent on the ECB’s non-standard liquidity measures. If the Portuguese scenario plays out in a similar fashion to Greece and Ireland over the coming months we could see the euro put under more pressure.

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Written by Tom Tong

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