Pound not safe as USD bites back  

May 28, 2009

Overnight the dollar has snapped back against sterling from above the 1.60 level…the main driver was the benchmark 10-year yield rising through 3.5%.

The recent sharp rise in yields has come despite strong demand at the two Treasury auctions this week, notably from foreign investors.

This has soothed some concern over the long-term U.S. sovereign credit ratings outlook and supported the dollar. Global markets look for an increase in US treasury yield as a sign of economic recovery…in theory this is a positive, however if yields rally steeply this will lead to high long term interest rates which in turn will drive up costs.

The Dollar was also buoyed as Moody’s confirmed its credit rating, although it warned that it must reduce its debt levels once the economy returns to growth. The US dollar has also made gains against the Euro and the Yen with Japanese investors encouraged to move into dollar denominated overseas assets. Look for yields and equities to continue to drive the USD in the short term.

Data from the eurozone confirmed that the leading economic index came in at 1.8% in April- this is a positive for the eurozone but more evidence will be needed to conclude that the recession was nearing an end. This has helped the euro to gain slightly against the pound and the dollar. Reports of Korea and China buying euros and selling the dollar this morning as EUR/USD recovers from its overnight low of 1.3792.

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