The pound gained over 1% against the euro yesterday as fresh concerns emerged over the financial health of countries like Ireland, Portugal and Spain ahead of a crucial EU finance ministers meeting later on today. It continued to make gains against the US dollar, reaching a 2 month high as sentiment in the equity and commodity markets remain positive, diminishing the appeal of the US dollar as a safe haven currency. It fell however against the high yielding, commodity driven currencies like the Australian, New Zealand and Canadian dollars and South African Rand as commodity prices continue to reach record levels.
Last week saw successful bond auctions in Portugal, Spain and Italy and euro supportive comments from European Central Bank (ECB) President Jean-Claude Trichet which strengthened the euro by over 2c against the pound. The improved sentiment was, however, short lived. Rumours that the German coalition government is increasingly split on whether to increase the size of the EU bailout fund ahead of a key EU finance ministers meeting today; a visit by the IMF to Spain and Irish PM Brian Cowen facing a confidence vote in the Irish parliament later on today have done little to keep the positive momentum the euro built up between Monday and Thursday of last week.
The dollar posted its biggest weekly decline since last September against a basket of currencies.
Chinese President Hu Jintao in an interview with US journalists undermined the US dollar ahead of a visit to Washington later this week by suggesting that the international currency system dominated by the US dollar is a “product of the past”. Mr Hu also said China was taking steps to replace it with the yuan, its own currency, but acknowledged that would be a “fairly long process”. They reflect continuing tensions over currency issues between the two powers.
The Australian dollar is still feeling the effects of last week’s devastating floods in Queensland. It has now made fresh lows against the US dollar for three days in a row and continues under pressure against the euro. The euro had its best week in more than 18 months against the Australian dollar after better than expected bond auctions in Portugal, Spain and Italy calmed fears of a credit crisis in the region.
Joseph Capurso, a strategist at Commonwealth Bank, sees a potential gain of 2 cents for the euro this week should the meetings yield positive results, though that might not last.
Commentary by Tony Redondo, Senior Trader at Torfx.
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
