Dollar benefits from risk aversion

Tom Tong07/Sep/2011Currency Updates

GBP

Weak PMI data and the possibility of a further round of quantitative easing have helped to push the pound to a 1.5 month low. A slowdown in the service sector also added to British woes and further justified yesterday’s sell off. Due to sterling being currently classified as a high risk currency, the pound and other similarly noted currencies lost ground against the dollar as investors and institutions alike saw a retreat to safe havens.

At the Lloyds address last night, George Osborne stated that the UK would stick to its austerity measures but signalled the UK growth forecasts will be downgraded when he delivers his speech to parliament on the 29th November.

Markets are now seriously talking of a return to recession as the US posted weak jobs data, the Eurozone debt crisis has yet to be resolved and there are still apparent problems in the banking sector. With the UK’s largest sector, the services industry, posting its greatest decline in more than a decade and the manufacturing sector again contracting at its fastest pace for more than two years, optimism for the speed of the British recovery has somewhat diminished.

EUR

The euro suffered heavy losses again yesterday as the Market looked to further safe havens that did not solely include the Swiss Franc and Japanese Yen. The Swiss National Bank stated it would purchase unlimited amounts of foreign currency should it reach the 1.2 level against the euro, helping to ease pressure in the morning’s session, this was then reversed as again the markets looked for stability. With the looming interest rate decision on Thursday and speculation that the ECB should seriously consider a decrease the Euro is currently at a 2 month low against the dollar.

Despite the single currency being somewhat bolstered by relatively high interest in comparison to other nations, the talk of a possible decrease and or further asset purchase programmes in Trichet’s speech on Thursday could quite easily see the euro decrease further against the dollar. It is worth noting however that any negative data posted by the EU will do nothing to help other high risk currencies such as the pound.

USD

With the greenback buoyed by recent positive data and a distinct benefit from safe haven flows, the dollar was up against all major currencies. As Obama looks to address the nation on Thursday and the markets look to the Federal Reserve for further quantitative easing, the short term risk aversion trade will only help to further boost the US dollar. Technically there is a possibility the Market is looking for dollar highs posted mid-June before a possible reversal in the current trend.

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Written by Tom Tong

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