Draghi kicks euro can further down the road, as all eyes today set on opening of Olympics

Tom Tong27/Jul/2012Currency Updates

EUR

Comments made yesterday by Mario Draghi led to a sharp rally in markets. European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc. Financial markets surged on speculation the ECB will act to lower Spanish borrowing costs after yields on the nation’s bonds rose to levels that prompted bailouts for Greece, Portugal and Ireland. The ECB reluctantly started buying Spanish and Italian debt in August last year as part of its bond purchase program. The buying had little lasting effect and the ECB suspended the program in March.

Draghi said today that markets have underestimated the progress that’s been made in the euro area and that the monetary union is “irreversible.” Leaders this year have inked agreements that aim to push the single currency toward tighter joint budgetary surveillance and a so-called banking union. On the back of these comments by Draghi, we have seen the euro rally from near 3-year lows against the dollar, to reach 2-week highs. The question remains whether we will see these comments followed by strong actions; something which will be clearer following next week’s ECB meeting.

GBP

As Olympic fever grips the world, all eyes are on Great Britain. The pound jumped against the dollar on Thursday but lagged the euro, pegged back by expectations of further monetary easing by the Bank of England and risks that the UK could lose its top-notch credit rating amid a rapidly deteriorating economic outlook.

The euro and most currencies seen as riskier bets including the British pound rose sharply against the safe-haven dollar after European Central Bank President Mario Draghi sent a strong signal that policymakers were ready to act to save the single currency.

Traders said his comments could be a precursor to more support measures from the ECB, driving investors to unwind large bearish bets both in the euro and the British pound. Investors have been preferring the safe-haven dollar and the yen in recent months on growing signs of a global slowdown and as the euro zone debt problems intensified.

USD

The dollar index, which measures the greenback against a basket of six other major currencies, declined from 83.573 on Wednesday to 82.834 yesterday despite claims for jobless benefits falling to near a four year low. The drop in claims was much sharper than analysts’ expectations and bodes well for the US economy building on the positive durable goods figures seen in June. The dip in the dollar index can be attributed to a slight change in risk appetite on the back of the positive news releases. Today we have the US GDP figures which will be eagerly anticipated following the UK’s poor showing earlier in the week. Compared to the eurozone and UK, the US economy has been fairly buoyant and a par or positive reading compared to expectations could fuel further dollar strength in the coming weeks.

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Written by Tom Tong

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