Euro rises despite decline German business confidence

02-24-2009 15:32

The euro rose considerably through overnight trading, reaching a 1.2800 level as the German IFO reading surprisingly dropped to 82.6 from 83.0; the poorest level since 1990. Economists expected business sentiment to remain stable while a German stimulus package and renewed banking concerns could negatively affect each other. As a sign of future growth, its expectations component improved for the second month, which could be a result of expectations that the ECB will cut rates further. This is proved by the fall in industrial new orders by 5.2% in December which demonstrated the current weakness in the economy.

Central bank remains confident

The central bank continues its measured approach which is considered to be behind the curve versus the US and other central banks. Ewald Nowotny, member of the central bank, stated: ‘I believe we can manage all the problems (of European banks) but I also believe that the business model of the past is over and needs to be changed’. Should the central bank succeed in stimulating business and consumer confidence in the European region, it could result in a sooner recovery than expected. The region could be facing deterioration if it fails which could danger the entire economic union.

Uncertainty stimulates dollar

Yesterday, US equity markets declined once again due to the banking industry concerns as the prevailing risk aversion stimulates the dollar. It is possible that stocks trade lower as a result of futures pointing to a higher open while there may be a natural retracement. Fear has increased due to the poor communication by US Treasury Secretary Tim Geithner while the government still has not announced the details of its plan to manage the toxic assets that are frustrating bank’s balance sheets. President Obama will address Congress and the nation today which may stimulate confidence. It is to be expected that consumer confidence, home prices and manufacturing will continue to fall, which will confirm the expectations of a deteriorating recession and will lead to risk aversion, adding support to the dollar.