Spanish bond auction weakens Euro as Dollar retraces previous gains

Tom Tong05/Apr/2012Currency Updates

EUR

The Euro fell on Wednesday after European Central Bank President Mario Draghi said downside risks to the Eurozone economy remained and any discussion of an exit strategy from the ECB’s loose monetary policy was premature.
The single currency was not helped by rising Spanish bond yields and weaker than expected increase in German manufacturing orders for February.

The Euro fell 0.9 per cent against the Dollar to a three-week low of as the ECB kept its main interest rate at 1 per cent. Mario Draghi’s dovish sentiments clashed with those shown in the minutes of the US Federal Reserve’s last policy meeting, released on Tuesday.

As the first quarter of 2012 is wrapping up, the Euro is once again on the rise. As of March 19, it was up 10 per cent against the Yen and 1.5 per cent higher against the US Dollar
Spanish ten-year yields touched their highest levels on Wednesday after a disappointing auction of the country’s debt failed to reassure investors ending the trading day 25 basis points higher at 5.66 per cent the highest since early January.
The Eurozone looks poised to slip back into recession, according to manufacturing and service sector surveys, and although the bloc’s sovereign debt is not displaying the same degree of stress seen at the turn of the year, anxiety levels remain unhealthy.

USD

Only two members of the Federal Open Market Committee cited the need for further QE should the US economic recovery falter. This more hawkish outlook was somewhat unexpected after dovish comments over the past month from Ben Bernanke, the Fed chairman. The Dollar index added a further 0.5 per cent as the greenback made gains against most of its major trading partners. Supported further by solid employment data from ADP. Investors are cautiously awaiting the US non-farm payroll report on Friday. A positive unemployment reading was expected to provide more support for the greenback. The only main currency to trade up against the US Dollar on Wednesday was the Japanese Yen, gaining 0.5 per cent as declining risk sentiment buoyed the Japanese currency.

Reduced expectations of US liquidity hit emerging market confidence, as a result most other Asian currencies fell due to the fact liquidity provided by the Fed is often invested in emerging markets.

The Fed’s supposed reticence is that the economy may be in less need of support, putting more emphasis on economic data not to disappoint. The big news in this regard will come on Friday, when the US non-farm payrolls numbers are released.

GBP

Sterling rose to its highest in two and a half months against a broadly weaker Euro on Wednesday as a solid UK services sector survey eased UK recession fears and highlighted a contrast with a struggling Eurozone economy gaining 0.6 per cent against the Euro. UK economic outlook remains fragile and analysts said the pound would be vulnerable if any weak data in the weeks to come reignited worries the Bank of England could opt for another bout of quantitative easing.

A sharp market sell off took the FTSE 100 back to the 5,700 mark on Wednesday, with riskier banking and mining stocks leading the losers after hopes for more economic stimulus in the US took a hit.

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Written by Tom Tong

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