Dollar looks to strengthen as woes over Spanish and Greek uncertainties begin to re-surface

Tom Tong26/Sep/2012Currency Updates

GBP

Sterling retreated after hitting its highest level in more than two weeks against the euro on Tuesday, but looked set to hold firm amid continuing uncertainty over whether Spain will seek a sovereign bailout. The pound has been trading as a relative safe haven from the euro zone debt crisis. If these safe haven flows were to start to ease it could leave the pound more vulnerable to the continued economic weakness in the UK.

BoE Markets Director Paul Fisher struck an improved outlook for the U.K. as the Funding for Lending scheme is expected to expand private sector credit, and it seems as though the central bank will continue to endorse a neutral policy stance throughout the second-half of the year as the region appears to be emerging from the double-dip recession.

EUR

Spanish Deputy Prime Minister Soraya Saenz de Santamaria said the government needs to know to what extent the ECB will intervene in the secondary market as it looks to tap the EUR 100B bank bailout package, we may see the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support amid the persistent threat for contagion. The euro fell to a two-week low a gainst the dollar on Wednesday, dragged down by mounting worries about Spain’s reluctance to request a bailout even as anti-government protests turned violent.

The euro lost ground in Asian trading this morning as worries over Greece were also in focus as ECB executive board member Joerg Asmussen dismissed an idea raised by Athens that the country’s bonds held by the bank could be rolled over to bridge a financing gap. Greece is struggling to apply a fiscal overhaul mandated by the ECB, European Union and International Monetary Fund in return for a new tranche of bailout cash. Elsewhere, the ratings agency S&P slashed its forecasts for Eurozone economy, expecting contraction for the remainder of the year and then stagnation in 2014.

USD

The dollar advanced against major currencies on Tuesday after a US central banker said the Federal Reserve’s latest bond buying programme is unlikely to stimulate economic activity.

The ICE dollar index, which measures the US currency against a basket of six others, advanced to 79.672 from 79.571 on Monday. In a speech to financial market trade groups in Philadelphia, Federal Reserve Bank of Philadelphia President Charles Plosser said: “We are unlikely to see much benefit to growth or employment from further asset purchases.”

While criticising the Fed’s new bond buying programme, he added that the central bank may increase interest rates way before the current mid-2015 target. The greenback was also boosted by some encouraging data on the US housing market. The S&P composite index showed US house prices increased 1.6% in July, to almost a two year high.

Conversely the yuan was mostly flat at midday on Wednesday as unusual large dollar sales by Bank of China , according to traders, counteracted elevated demand for the greenback ahead of a week-long holiday beginning Monday. Opinions differ about the effect of the holiday, but most traders now say that dollar demand from corporate clients is elevated near month end, in particular, oil companies require dollars in this period to pay for imported crude.

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Written by Tom Tong

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