Dollar Makes Gains Against Pound and Euro

June 8, 2009

The USD continues to fightback this morning making further gains against the pound and euro. Cable is down to the low 1.58’s after kicking off at 1.5930- the USD is seeing across the board strength and sterling is weak in it’s own right. The Dollar is rallying following a positive move after the better than expected US jobs data on Friday- US non-farm payrolls fell by 345,000 in May over a forecast for a 520,000 drop.

Interestingly the market is now turning to buying the dollar on the improved data- previously the USD was sold on better data as risk appetite increased causing a flow out of dollars into higher yielding currencies. This is significant as it shows that confidence is creeping back into the US economy even in the light of long term concerns on the health of the US economy.

Sterling continues to slide following rumours of Gordon Brown’s resignation on Thursday sweeping the markets- the speculation was quickly denied but the damage had already been done. The pound remains under pressure as expected dismal European election results fed through heaping more pressure on Brown and heightening the uncertainty on his tenure. It is a well known trend that political uncertainty will weaken a currency- the fact that this uncertainty is arising amid an economic crisis and extremely volatile and fragile markets magnified the moves in sterling.

The pound was not helped when former Bank Of England member David Blanchflower stated that the Bank may expand and widen its Quantitative Easing programme. Last week the BoE did not move further on their QE programme and maintained the level at 125 billion pounds. The central bank has the authority to expand to 150 billion and ask permission for more if required, Blanchflower feels that the current level of QE will not bring inflation back to target and therefore assumes that there will be more to come.

The introduction of the QE programme and the subsequent expansion of it in May has been historically sterling negative, therefore further discussion and action on this is presumed to be sterling negative.

Elsewhere concerns were again raised over the health of the Baltic states as Latvia raised its deficit projections and a government bond auction failed. This led to losses in the Swedish krona and the euro which are both exposed to the region. The stability of the Baltic states has been mentioned previously and any worsening of the situation could impact on the euro further.

Report by Phil McHugh

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