Dollar rally continues at record pace as Euro continues to suffer

Tom Tong16/May/2012Currency Updates

GBP

The UK visible trade deficit for March came in wider than expected at -£8.56 billion, whilst the import of goods from Europe was way up to £17.6b with only a small rise in exports to Europe. Exports of goods to non-euro countries rose from £11.8 billion to £13.2 billion. Therefore, the widening of the trade deficit to Europe was offset by the narrowing of negative balance to non-EU countries.

The Euro debt crisis has clearly curbed demand for British goods in Europe, which is the UK’s biggest export market. As the pound continues to strengthen against the Euro, the trade deficit between the UK and Europe will continue to grow which could be cited as one of the contributors to the fall in the first quarter of UK GDP.

Short term movements in sterling, however, will be dominated by events in the eurozone with sterling hitting a fresh three-and-a-half year high against the Euro yesterday as fears that Greece might exit the eurozone were fuelled by the country’s continuing failure to form a Government after an inconclusive election.

In other news, Britain refused to back a 700-page draft law, designed to introduce globally agreed standards for European banks, with Osborne imposing higher capital requirements on British banks than called for in the European law which will reduce the possibility of an opt-out.

EUR

Strong production in Germany could not make up for a slump across the rest of the eurozone in March with declining output at factories falling and signalling an oncoming recession may not be as mild as policymakers had hoped. Industrial production in the 17 countries sharing the Euro fell 0.3 percent in March.

Purchasing managers indexes (PMIs), which primarily cover services, suggested a recession across the continent’s currency union could now extend to mid-year and be deeper than previously thought.

The eurozone surveys raise questions over whether the trillion Euros in loans the ECB has pumped into the banking system since December had filtered into the real economy.

Markets collapsed again yesterday after Greece announced that new elections will take place next month. Stocks dropped across Europe, and struggling eurozone governments saw their borrowing costs jump sharply on the renewed uncertainty. Fears of a bank run in Greece were also escalating yesterday after minutes of a meeting between President Karlos Papoulis and party leaders showed that up to €800m of deposits left Greek banks on Monday alone as customers started withdrawing cash in case capital controls are introduced or the country leaves the Euro. To put that into perspective, over a month net withdrawals tend to be between €2 – €3 billion.

USD

The Dollar continued its ascent on Tuesday as markets fret about Greece’s future in the eurozone. The Euro hit a four-month low yesterday coming under renewed pressure a day after Greece called a new election.

The Dollar may be forming a base against the yen, a move that could spur a longer-term uptrend, according to Bank of America Corp. A close above two-month resistance may be the first signal that the Dollar is basing, or ending its decline, and gearing up to resume a bullish trend started in February.

The Dollar index, which measures the greenback against a basket of six currencies, rose for a 12thstraight session, something it hasn’t done since at least 1985.

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Written by Tom Tong

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