Euro Currency Update

Euro Currency Update

The last week belonged to the US dollar. It strengthened against the whole field, with the commodity-oriented and emerging-market currencies bringing up the rear. The euro lost just over a cent to the dollar and sterling fell even further behind, leaving the euro half a cent firmer against the pound in the foreign exchange update provided by industry specialists.

Not for the first time it was developments across the Atlantic that held investors’ interest. On Wednesday the Federal Reserve Chairman, Ben Bernanke, set out his road map for the wind-down (or “tapering” as the media like to call it) of the Fed’s long-running programme of monetary stimulus. In its most recent iteration that stimulus has taken the form of $85bn a month being spent on mortgage bonds. Everyone knows that at some point it must come to an end but after five years of ultra-cheap money investors cannot remember what “normal” conditions are, so they fear their return.

Since he first hinted at an end to those bond purchases a month ago the chairman had been accused of being uncommunicative about future policy and its likely timing. Mr Bernanke clearly took note of the criticism and on Wednesday decided to lay his cards on the table. The wind-down is likely to begin within the next few months as long as the US economy continues to show signs of recovery. That was more information than investors had needed and they reacted by buying the dollar and selling commodity and emerging market currencies as well as equities. Logically, the dollar ought to strengthen as the Fed winds down the dilution of its currency, implying a lower euro against the dollar. For more information on sending money abroad please click here

If that outcome is hedged about with the ifs and buts attached to the impossibility of predicting America’s economic performance, the prognosis for the euro against sterling is even more of a conundrum. For the last three months the pound has been stuck between €1.16 and €1.19. There have been attempts to break out of that range in both directions but none has been successful. Some commentators argue that the pound is still overvalued; others that the problems of peripheral Euroland are simmering below the surface and could explode at any moment.

The latter will point to the latest developments in Greece, where the government has closed down the state broadcaster, ERT, provoking at least one coalition partner to threaten the withdrawal of its support and the possible collapse of a hard-won political compromise. There is also the matter of the German constitutional court. On 11-12 June the court heard arguments for and against a claim that the European Central Bank would be operating ultra vires if it spent German taxpayers’ money on the support of Spanish and Italian government bonds. The court’s verdict has yet to be handed down, and those in the know reckon it is unlikely to be a flat “no” to the ECB’s Outright Monetary Transactions (OMTs). But if the constitutional court decides that conditions should be attached to Germany’s participation it could still damage the credibility of the ECB president’s promise to do “whatever it takes” to preserve the euro. Doing “almost whatever it takes” won’t really cut it with investors.

This helpful business information was sponsored by Money Corp.

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