Fed Beige Book data disappoints as Draghi hints at 'exceptional measures' needed to tackle crisis

Tom Tong30/Aug/2012Currency Updates

GBP

Yesterday saw some marginal gains for sterling against both the euro and the dollar. However, many analysts believe the move will retrace in the coming days. The pound was up 0.3 percent versus the common currency, edging away from a three week low witnessed the day before. Traders have attributed this with the European Central Bank diversifying euro reserves into alternatives, including sterling. With the ECB expected to announce a bond-buying programme to lower borrowing costs for Spain and Italy at the approaching policy meeting, the euro is once again anticipated to strengthen against its peers.

Against the dollar, sterling was up 0.1 percent on Wednesday. This move was helped by a survey released showing a pick-up in UK inflation was expected, though the impact was tempered by ongoing worries about the fragility of the economy.

EUR

The euro fell against the dollar and sterling on Wednesday, reversing some of the previous session’s gains, though losses were limited with some investors betting the European Central Bank will yet act decisively to tackle the debt crisis. The ECB president Mario Draghi said yesterday in a newspaper piece that the bank would need to employ “exceptional measures,”which pushed many analysts in the market to speculate it was working on a plan to buy bonds to lower peripheral eurozone states’ borrowing costs.

There will be some negotiations taking place over the coming days ahead of the policy meeting due to German Bundesbank being opposed to bond buying. However, ECB policymakers are working overtime to ease its fears.

USD

The dollar benefited from both better than expected economic growth and strong home sales in the U.S. which in turn helped push the greenback higher against most major currencies on Wednesday. The gains seen by the US dollar was also helped by the Commerce Department announcing that the economy grew at an annual rate of 1.7 in the April-June quarter, which was far better than its initial estimate of 1.5 percent.

If Bernanke does not hint at any near-term easing at the next Fed meeting, the dollar could continue strengthening versus its major counterparts.

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Written by Tom Tong

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