Eurozone woes continue as political uncertainty reigns in France, Holland and Czech Republic

Tom Tong24/Apr/2012Currency Updates

GBP

Sterling hit its strongest level against the single currency in 20 months as investors sold eurozone peripheral sovereign debt and bought into the relative safety of gilts. Sterling strength was also bolstered by growing expectations that the Bank of England would not extend its quantitative-easing programme next month. The Bank of England’s Monetary Policy Committee minutes released last week indicated a more hawkish mood and have given sterling a significant boost with only one member of the nine-strong committee voting for an increase in the Bank’s asset purchase programme.

However, the pound slid against the key haven currencies, the dollar and the yen, which strengthened in response to investor jitters over the eurozone. Sterling lost 0.2 per cent to dollar and fell 0.7 per cent to Yen. Despite sterling’s rally, forthcoming economic data could prove negative for the pound. With first-quarter GDP figures to be released on Wednesday are expected to show 0.1 per cent quarter-on-quarter growth. However, higher inflation could hamper policy makers’ ability to respond to any unexpected dip in economic growth.

Despite weak UK growth, the pound is looking remarkably resilient. This resilience is because of the poor competition from other industrialised economies: the euro is dogged by the region’s debt crisis and the dollar is losing after disappointing non-farm payrolls earlier in the month. A deepening eurozone crisis may be a mixed blessing for sterling as the the UK economy is so closely tied to the single currency. About 50 per cent of UK trade is with the eurozone.

EUR

The debt crisis has once more infected the core of the eurozone. Political uncertainty in France and the collapse of the coalition in the Netherlands (both countries until now regarded as relatively safe from contagion in Europe) have stoked fears that the eurozone crisis could be about to intensify further.

The last time Dutch and French borrowing costs jumped relative to Germany’s was in November as worries surfaced about a possible break-up of the euro. Few governments apart from Berlin were spared as markets suffered a miserable final quarter of the year, with German manufacturing shrinking at its fastest pace in nearly 3 years

Even with Euozone spending cuts, debt in countries that use the euro rose to 87.2 percent of GDP in 2011 from 85.3 percent in the previous year indicating further troubles ahead.

USD

Bulls say the dollar will benefit from increased U.S. hiring and an economy that’s projected to grow this year, almost double than it’s G10 counterparts. The currency will also gain if global and U.S. growth slows as Europe’s debt crisis worsens, boosting demand for dollar assets such as Treasuries as traditional havens from market turmoil diminish. The dollar has benefited from its role as the world’s reserve currency, with 62 percent of global holdings

However, the dollar may be expected to decline as, whilst the U.S. unemployment rate is at the lowest in three years, payrolls increased by the least in five months in March and the Fed may introduce more QE before year-end. Data out today from the US which markets will be reacting to will be consumer confidence figures and new home sales, providing investors with more evidence that the US economy is still improving or moving back into global economic woes.

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Written by Tom Tong

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