Dollar suffers as markets react to "risk on"

Tom Tong13/Oct/2011Currency Updates

GBP

  • Sterling hits near four-week high versus dollar
  • Sharp squeeze of long dollar positions fuels sterling rally
  • British Pound Rallies Despite a 15-Year High in Unemployment

Sterling surged to 1.2 percent (4 week high) against a soft dollar on Wednesday as investors pared back long positions in the U.S. currency, offsetting the negative impact of rising UK unemployment and persistent concerns over an ailing British economy.

A rise in jobless claims through September was smaller than expected (17,500); but the 15-year high in unemployment alongside the highest overall number of jobless since 1994 paint a picture of impending, austerity-driven recession. This is short-term versus long-term.

With no overly positive or negative news for either currency, analysts consensus was that the recovery had been fuelled by a squeeze of excessively short positions on the pound.

In an interview with news agency Reuters yesterday, BoE chief economist Spencer Dale expressed fears that the British economy is likely to get weaker through the rest of the year, and that the Bank of England’s future decisions on asset purchases will be largely driven by overseas developments.

EUR

  • Euro Traders Gaining Clarity on the Hard Policies the EU will Take

Investor appetite for risk heightened on Wednesday after lawmakers in Slovakia (now the last country in the 17-member currency zone left to approve the revamped European Financial Stability Facility) struck a deal to ratify more powers for the euro zone’s rescue fund, effectively ending for now a crisis for the euro, which also weighed on equities and other risky assets.

The euro extended gains, helped partly by surprisingly strong data on the euro zone’s August industrial output. The single currency rallied 1.3 percent (4 week high) against the dollar after it broke an options barrier at $1.3700, also rallying against the yen, up more than 2 percent, the highest level since 9th Sept.

Despite the swing in risk appetite, weary investors will now be looking to the European Union to announce a bank recapitalization plan designed to cushion any impact from potential default by Greece on the region’s banks.

USD

  • Dollar Revives its Bear Trend as S&P 500 and Risk Surge
  • Fed Minutes show QE3 remains likely

The dollar suffered broad losses on Wednesday as euro positive developments saw an unwinding of recent risk aversion led gains, with investors opting instead for higher yielding ‘risk’ currencies. Significant losses were pared against all major currencies.

Fed minutes released last night showed that a controversial third phase of QE look likely. Two of the fed’s committee said “that the current conditions and the outlook could justify stronger policy action” than the central banks Operation Twist.

Print

Written by Tom Tong

Vestibulum id ligula porta felis euismod semper. Donec ullamcorper nulla non metus auctor fringilla. Cras justo odio, dapibus ac facilisis in, egestas eget quam. Morbi leo risus, porta ac consectetur ac, vestibulum at eros. Donec ullamcorper nulla non metus auctor fringilla.