Euro rescue fund clears final hurdle as G-20 Meetings kick off

Tom Tong14/Oct/2011Currency Updates

EUR

The euro advanced against the dollar and yen before Group of 20 finance ministers meet and policy makers discuss plans to tackle Europe’s debt woes.

The shared currency headed for its first five-day advance in a month as nations from China to Brazil are considering increasing the International Monetary Fund’s lending resources, G-20 and IMF officials said. The euro earlier declined after Spain’s credit rating was cut by Standard & Poor’s.
It was cut for the third time in three years as slowing growth and rising defaults threaten banks and undermine efforts to contain Europe’s sovereign-debt crisis.The ranking was reduced by one level to AA-, S&P’s fourth- highest investment grade, with the outlook remaining negative, the rating company said in a statement late yesterday. Fitch Ratings downgraded Spain to the same level on Oct. 7, when the company also cut its rating on Italy.

Meanwhile, Greek bondholders are preparing to lose as much as 60 percent of their investments as European leaders try to impose a solution that reduces the nation’s debt burden by enough to end the debt crisis. Analysts are also expecting German GDP to fall further than expected in 2012.

GBP

The British Pound struggled to hold its ground on Thursday as the Bank of England talked up speculation for additional monetary support, and the sterling may trade heavy over the coming days as the central bank maintains a highly dovish outlook for future policy.

These concerns were compounded by Wednesday’s data showing the number of unemployed at its highest since 1994, while the central bank’s decision to implement more quantitative easing was expected to remain a negative factor for sterling.

As the MPC steps up its effort to shield the U.K. economy, we may see a growing argument to expand the asset purchase program beyond the GBP 275B target, and speculation for further easing is likely to weigh on the exchange rate as market participants weigh the outlook for monetary policy. In turn, the GBP/USD may trade heavy ahead of the BoE minutes on tap for the following week.

Yesterday Fitch cut the long term default ratings of RBS and Lloyds in an expected but disappointing knock to the British banking industry. However UK exports increased to their highest level in August.

USD

The greenback was weaker at the close of North American trade with the Dow Jones FXCM Dollar Index as the greenback fell against three of the four component currencies The dollar pared early gains throughout the session as risk assets slowly fought their way back.

Tomorrow’s economic docket is highlighted by the September advanced retail sales report and the October University of Michigan confidence survey. Consensus estimates call for sales to increase by 0.6%, up from a flat read the previous month, with consumer confidence expected to climb to 60.0 from 59.4. The data has the capacity to fuel the recent shift into risk assets with the dollar likely to remain under pressure should investor appetite continue to improve.

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Written by Tom Tong

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