Currency Update – 18/07/2012

On Wednesday, German Chancellor Angela Merkel commented on the state of the Eurozone and said that the future for the conglomeration of nations was uncertain. After media reports of this comment came out, the euro fell to a 3.5 year low against the sterling. The Eurozone’s currency also fell to a session low against the greenback following Merkel’s statements.

The Future of the European Union

These were not the only lows reached by the euro during the trading session. After Merkel’s comments came out, the euro dropped to an 11.5 year low against Sweden’s currency and a record low versus the Australian dollar. Meanwhile, the interest rate on European bonds gained amid the negative market sentiment. Overall, the Eurozone’s currency dropped 0.6 percent against the United States dollar to reach $1.2219. It also dropped versus the Japanese yen to 96.51. This recent fall is close to the six-week low of 96.17 that the euro reached on Monday. Versus the Swedish crown, the Eurozone’s currency stands at 9.5785 which is an 11.5 year low. Against the Australian dollar, the euro is at A$1.1858 which is a record low for the euro.

The trend in Europe was not helped by continued high yields on Spanish and Italian bonds. In April of 2012, ban loans in Spain accounting for 8.72 of a bank’s outstanding portfolio. In the report from May, bad loans had gained to 8.95 percent. This 18 year high has fueled investor concern about the necessity of a complete bailout of the Spanish economy. With all of the negative outlook surrounding the currency, the euro has understandably fallen against most major markets.

Ben Bernanke Speaks

On Tuesday and Wednesday, the chairman of the United States Federal Reserve Bank gave his testimony before congress. This semi-annual speech is supposed to cover the outlook of the economy and address any fiscal issues. Some of the statements made in Ben Bernanke’s Tuesday statement led investors to speculate about future rounds of quantitative easing. Bernanke did not specifically say when new monetary policies would take place, but hinted at the possibility of future measures.

Bernanke is expected to speak again on July 18, 2012 at 1400 GMT. Wednesday’s portion of the testimony will include a question and answer session where investors may get an inside glimpse at his expectations for the marketplace. If Bernanke appears ready to inject money into the markets, the United States dollar could soften. After Tuesday’s well-received testimony, the United States dollar rose 0.3 percent against a basket of other currencies. It notably fell 0.1 percent versus the yen to land at 78.96 yen.

Sterling Rises

The United Kingdom pound managed to rise after Merkel’s comments. It gained to a 3.5 year high against the euro. Later in the day, the sterling had fallen following a release of the Bank of England’s minutes. The central bank of the United Kingdom has reportedly been discussing an interest rate cut and purchase of more assets.

Bank of England Minutes

The minutes report from the Bank of England’s Monetary Policy Committee showed a vote of 7 to 2 on purchasing more assets. This quantitative easing program is planned on increasing by 50 billion pounds despite committee members considering an even larger increase.  The United Kingdom’s pound dropped 0.1 percent against the greenback to $1.5626.  Support for the pound is seen in the $1.5680 to the $1.4685 range.

Economic data coming out of the United Kingdom shows a few positive developments. With the Olympics just around the corner, many Londoners have been hired to fill extra positions and roles. Unemployment numbers fell on Wednesday as more Britons when back to work while the Olympic Games are in town.

Despite this positive news, the total number of people claiming unemployment was still higher than economists had expected it to be. Economists had expected unemployment to fall in the lead up to the Olympic Games. In addition to a weak economy, the United Kingdom has had to deal with fall out stemming from Europe. As one of the European Union’s leading trading partners, Britons are severely impacted by any economic downturn in the Eurozone. With the Olympics set to end in another month, the drop in unemployment may be short-lived.