Eurozone leaders struggle to find resolution as rhetoric of Greek exit intensifies
24/May/2012 • Currency Updates•
Sterling hit a two month low versus the dollar as poor retail sales data came out yesterday. This was compounded by persistent concerns about a possible Greek exit from the euro, which prompted investors to sell what they see as riskier currencies. The pound climbed versus a broadly weaker euro as hopes that a European Union summit might make progress in tackling the debt crisis faded, and rumours are abound that eurozone members are preparing for a Greek exit.
Minutes from the BoE’s May policy committee meeting showed members voted 8-1 to keep the bank’s asset purchases unchanged, which provided some support for the pound given some market players had been positioned for a closer vote. However, for several members, the decision not to expand the 325 billion pound programme was “finely balanced” and analysts said the minutes left the door firmly open for more quantitative easing later in the year, possibly reducing investor confidence in the pound in the long run.
European leaders put off any decisions on shoring up the region’s banks at a late-night summit on Wednesday despite rising concerns that instability in Greece was undermining confidence in the eurozone’s financial sector.
Instead, the heads of the EU’s main institutions were given the task of drawing up proposals for closer fiscal co-ordination in time for another summit next month; plans that could include a path towards a Europe-wide deposit guarantee scheme and, in the longer term, commonly-backed eurozone bonds. No decisions were made on such proposals as injecting €10bn in new capital for the European Investment Bank.
Germany’s Angela Merkel is still steadfast in her opposition to the creation of eurozone bonds, which is seen by many as a last throw of the dice to save the common currency. She claimed that “much stronger economic cooperation” in the region is needed before euro bonds can be issued.
The euro hovered just above its 22-month low against the dollar on Thursday and remained vulnerable to further declines as the prospect of a Greek exit from the eurozone kept investors on tenterhooks.The euro drew little comfort from an informal summit of European Union leaders that shed no new light on how the eurozone nations intend to tackle their debt crises, including the threat of Greece’s exit from he euro. Germany’s Ifo business climate index is predicted to fall casting further doubts over the common currency.
The dollar has taken a backseat in the headlines this week as the world looks to the furthering eurozone crisis. There was a distinct difference in performance between basic risk trends and the US dollar. Though the Dow Jones Industrial Average briefly tested a new low for the year, it quickly recovered most of its lost ground. Good data earlier in the week and good data expected today in the form of core durable goods orders make the currency’s outlook good.
The greenback has been boosted owing to its status as the world’s reserve currency. Uncertainty and lack of cohesion in the eurozone, news of a slowdown in the far east, and poor data in the UK have led investors to flood into the dollar.