Expectation grows that the ECB will take action to cap bond yields as Sterling surges against the Dollar
22/Aug/2012 • Currency Updates•
Sterling rose to a three-month high against the greenback yesterday but dropped against a rallying euro due to growing expectations that the European Central Bank will take action to ease Spanish and Italian borrowing costs.
The anticipation of measures being taken next month to tackle the eurozone’s debt crisis bolstered investors, helping equity markets and currencies seen as higher risk, including sterling.
The pound underperformed the euro, with the market’s focus on ECB action sparking a broad rise in the single currency. Weak UK public finances and manufacturing orders data also encouraged investors to sell sterling against the euro. Public sector net borrowing came out at -1.8B, down from the previous figure of 12.2B.
Despite no relevant macroeconomic data being released yesterday, the euro rose to six-week highs against the dollar and yen before regional leaders meet this week to discuss Greece’s fiscal adjustment program amid optimism the European debt crisis is being contained.
The 17-nation currency appreciated for a second day versus the greenback after Germany indicated concessions for Greece were possible and as Spanish borrowing costs declined at a bill auction. However, there is still concern with Spain as budget deficit targets look unachievable, so the risk of a potential full bailout of the Spanish economy is still there.
The dollar continued to fall yesterday as investors poured into risk assets, with the S&P 500 touching a four-year high in early morning activity. The dollar has come under pressure lately against the euro as investors have continued to price in the likelihood of action from the ECB to intervene and reduce borrowing costs in the eurozone periphery. Overall, the dollar index fell (of which the euro takes a 57.6 per cent weighting) 0.6 per cent yesterday.
This morning, the dollar has gained versus most major peers before data that may show an improving U.S. housing market. The greenback has advanced 7.1 percent in the past 12 months, the best performance amongst currencies alongside the Australian dollar.
Sales of existing homes probably climbed in July from an eight-month low as a drop in borrowing costs is making homes more affordable, adding to signs U.S. housing may pick up in the second half of the year. The Fed will release records of its two-day meeting concluded on Aug. 1. Investors will be looking over the minutes of the Federal Reserve’s last meeting on Wednesday, damping prospects the Federal Reserve will start another round quantitative easing.