Euro remains under pressure as fears over the German economy surface and ECB overnight deposits hit new high

Tom Tong10/Jan/2012Currency Updates

GBP

Sterling traded close to a 16-month high against the euro on Monday with investors cautious on the single currency after more negative news on Greece over the weekend added to concerns about euro zone sovereign funding pressures. It has been buoyed by investors seeking refuge from the euro zone debt crisis in recent weeks and has benefited from safe haven flows from Europe with the main assets being real estate and British government debt.

UK growth was weak in 2011 and the Bank of England forecasts it will grow at an annual rate of just 0.8 percent through most of 2012, while others think it may dip into recession. With little UK economic data scheduled the main event of the week for sterling investors is likely to be the Bank of England rate decision on Thursday. Policymakers are expected to keep rates on hold at 0.5 percent and maintain the quantitative easing target at 275 billion pounds.

EUR

Yesterday saw sentiment towards the Euro hit fresh lows, as the vast majority of investors drew the conclusion that the single currency will not survive in its current configuration. The net speculative position at the IMM is record short euros. The single currency’s five week losing streak against the dollar is the longest in a year and a half and pushed the euro to sixteen month lows earlier today. Further trouble for the single currency saw the euro fall to record lows against the Australian dollar, eleven year lows against the yen and 15 month lows against sterling. Concerns where raised yesterday as overnight deposits at the ECB reached all time highs as bank looked to hoard cash to avoid funding problems. Despite, German bond yields entering the negative (with investors paying Germany to hold there bonds) fears where raised that the economy is entering into recession with only exports bolstering there trade balance. Elsewhere, Hungary also began bailout talks with the IMF as they look to sooth market worry.

USD

The dollar will climb to its strongest since July 2010 versus the euro as the U.S. reduces its dependence on oil imports and faster growth draws investors to the nation’s assets. The U.S. currency has gained 2.4 percent over the past three months against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes amid prospects an expansion in the world’s largest economy will outpace growth in the euro area and Japan. The greenback will also benefit as U.S. firms tap the nation’s shale gas, lowering its current account deficit, UBS said. UBS predicts a narrowing in the U.S.’s current account deficit may be accompanied by an end to a decade-long diversification away from dollar assets by the nation’s fund managers, foreign central banks and sovereign wealth funds.

The U.S. dollar’s share of global foreign-exchange reserves climbed in the third quarter to the highest since late 2010, while holdings of euros declined to a three-year low, International Monetary Fund data showed last month. The U.S. currency’s portion rose to 61.7 percent in the period ended Sept. 30 from 60.3 percent in the prior quarter, according to the IMF. Gross domestic product for the U.S. will increase 2.1 percent this year compared with a 0.2 percent contraction in the euro area and 1.7 percent expansion in Japan, economists polled by Bloomberg News predict.

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Written by Tom Tong

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