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Euro Struggling, Unfortunately so is GBP…

Euro Struggling, Unfortunately so is GBP…

The euro is heading for its biggest weekly decline in a month versus the dollar on speculation sovereign-debt risk will hinder prospects for the euro-zone’s economic recovery. The greenback traded near its strongest level this month against the European currency before reports next week which may ease concern the U.S. economy is slowing. Market confidence in the single currency was not helped by the news from Deutsche Bank that it needs to raise as much as €9 billion partly to help boost its capital ratios.

For Sterling, the markets barely noticed yet another MPC meeting passing by, the entirely expected conclusion being a ‘no change’ verdict from the Bank of England. They did, however react to the release of UK trade data, which showed that the trade deficit has widened to a postwar record. A surge in imports accounted for the drift, a development that analysts view as reassuring about the strength of the domestic economy, but discouraging for growth prospects in the longer term. The relative weakness of Sterling against other major currencies makes the data all the more disappointing.

Meanwhile, the Australian dollar has climbed to a record high against the euro and a four-month peak against the US dollar as stronger-than-expected employment data lifted the currency. The news that Australian unemployment had dropped to its lowest level since the end of the financial crisis raised expectations that the Reserve Bank of Australia, which this week warned over the health of the global economy, would raise interest rates at its October policy meeting. The strong Australian employment figures were mainly because of strength in the mining sector, still benefiting from strong demand from China. Given, however, that the services and construction sectors are showing signs of dipping back into recession, Australia risks experiencing the curiously titled phenomenon of “Dutch disease”, in which increasing revenues from natural resources strengthens a country’s currency, adversely affecting other sectors of its economy.

Today, research from our own Bank of New Zealand shows that the global FX market has continued to grow over the past three years encompassing the financial crisis, but at a slower than average pace, the slowdown in world trade offsetting the encouragement to speculate offered by the sheer volatility that has characterised the markets in this time. In the UK, producer price indices have come in lower than expected this morning, whilst today also sees inventories data for the US.

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