Dollar reaches two year high against the Euro as likelihood of further QE diminishes

Tom Tong12/Jul/2012Currency Updates

USD

The dollar rose to a two-year high versus the euro and extended gains versus the yen after minutes of the Federal Reserve’s June meeting, released yesterday, showed “a few” policy makers said the central bank will probably need to take further action to boost the labour market.

The trade deficit in the U.S. narrowed in May as crude oil prices fell and demand weakened for consumer goods.

The trade gap with the European Union was the biggest since July 2008 as U.S. imports from the region jumped more than exports, reflecting the drop of the euro.

The outlook for U.S. exports may dim and The Federal Reserve is open to the possibility of a new round of asset purchases.

GBP

The pound rose to its strongest since November 2008 against the euro as concern that legislation needed for Europe’s permanent bailout fund will be delayed, boosting demand for the relative safety of the U.K. currency.

Sterling also made its largest intra-day gain this month versus the dollar amid speculation that minutes of the Federal Reserve’s June meeting to be released today will show U.S. policy makers are moving closer to expanding their stimulus program, which would mean a weakening of the dollar. However, this morning, we have seen sterling drop off sharply against the dollar after minutes of last month’s Federal Reserve meeting showed additional asset-buying by the Fed was not imminent and likely to occur only if US economic conditions worsened.

U.K. government bonds rallied, with the 10-year yield dropping to the lowest level in a month. It is scheduled to sell 3.5 billion pounds of bonds maturing in September 2022 at an auction today.

EUR

Spain’s government yesterday announced new austerity measures to further reduce its budget deficit. The Spanish Prime Minister said sales tax would rise from 18% to 21%, and local authorities would have their budgets slashed.

He is aiming to save 65bn euros (£51bn; $80bn) as part of a deal with eurozone leaders to help rescue Spain’s banks.

The ECB’s Monthly Report will be watched closely along with May Industrial Production data for the eurozone.

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Written by Tom Tong

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