Dollar struck as Summit ease stability fears

Tom Tong27/Oct/2011Currency Updates

GBP

  • Sterling comes off earlier seven-week high vs dollar
  • Pound tracks euro, with market focused on EU summit
  • Survey shows drop in UK factory orders

Sterling pulled away from a seven-week high against the dollar on Tuesday as it tracked movements in the euro in a market nervous ahead of a Brussels summit flagged as key to resolving the euro zone’s debt crisis. Sterling was down 0.1 percent against the dollar, off its strongest level since Sept. 8, with traders saying selling by a UK clearer had helped weigh on the currency.

Sentiment towards sterling was knocked slightly by a survey showing British factory orders fell at their fastest pace in a year in October, though the pound’s reaction was muted.

Technical analysts highlighted the 55-day moving average crossing below the 200-day moving average for euro/sterling, often seen as a bearish signal. The 55-day has traded above the 200-day since November 2010.

“The outlook remains negative (for euro/sterling) – it has recently failed at the 87.94 pence late-September high and directly above the market lies tough resistance, which extends to the 88.86 August high and we favour failure here,” technical analysts at Commerzbank analysts said in a note.

Further falls could see the euro move towards the 200-week moving average, they said.

The fundamental outlook for sterling remains bleak, with economic growth fragile and the Bank of England implementing a further round of quantitative easing.

USD

The dollar zeroed in on a record low against the yen after the Bank of Japan, as widely expected, decided to ease policy by expanding asset purchases by 5 trillion yen ($65.8 billion), to 20 trillion yen.

As a result the Greenback dipped 0.3 percent to 75.95 yen , a stone’s throw from the record low of 75.71 yen plumbed the day before.

The move in the euro and other risk currencies saw the dollar index hit a new seven-week low of 75.757, down from an overnight high of 76.662. The index has been on a downtrend in the past few weeks.

“A dovish Fed, easing in dollar funding/liquidity conditions, OK corporate earnings from any company that earns revenue abroad, and fading fears of crisis as we await decent Q3 GDP data, all make for a fundamentally bearish dollar outlook,” said Kit Juckes, a strategist at Societe Generale.

EUR

  • EU, banks agree 50% private-sector losses on Greek bonds
  • Details of deal to be finalised by year-end
  • Euro rally stalls on resistance at Key levels

The euro hit a seven-week high on Thursday after EU leaders and banks reached a deal on a 50 percent writedown for private bondholders on their Greek debt and made progress in other areas crucial to stemming the debt crisis.

The euro jumped 0.6 percent to $1.4000 , breaking through a wall of orders and charging past stop-loss points on the way, also bolstered by the EU’s progress on bank recapitalisation and its move to scale up the size of the euro zone’s 440 billion euro ($600 billion) bailout fund, the EFSF.

Under the deal, the private sector agreed to voluntarily accept a nominal 50 percent loss on its bond investments to reduce Greece’s debt burden by 100 billion euros, cutting its debt to 120 percent of GDP by 2020 from 160 percent now.

JPY

Japanese Finance Minister Jun Azumi said Japan would benefit from a stable Europe, after European Union leaders and banks reached an agreement towards stemming the region’s debt crisis.

The decision by Europe’s policymakers and banks to agree to a 50 percent write-down for private bondholders of Greek debt was a “big step forward”, Azumi told a parliamentary financial committee on Thursday.

Euro zone leaders struck the write-down deal with private banks and insurers as part of a plan to lower Greece’s debt burden and try to contain the two-year-old euro zone crisis.

The BOJ eased policy by boosting purchases of government bonds as the yen’s recent rise to record highs and Europe’s lingering debt woes cloud the outlook for the world’s third-biggest economy.

The dollar fell to a fresh record low against the yen on Wednesday and the finance minister said he would take every measure to counter speculative moves in the market pushing the yen up further.

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Written by Tom Tong

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