Euro and pound fall on increasing risk aversion

04-08-2009 15:30

The euro dropped to 1.3147 as a result of the gloomy report from aluminum manufacturer Alcoa, which proved decreasing worldwide demand and declining commodity prices as the cause for their $0.59 loss. The eurozone fundamentals stimulated pessimism, while for the fifth month German exports dropped by 0.7%. Still, external demand exceeded expectations for a 3.3% fall. The weakening internal demand was proved by the 4.2% decrease in imports and resulted in an increasing trade balance from 7.0 billion to 8.7 billion. In February German industrial orders dropped for a sixth month by 3.5%, reaching an annual record low of 3.82%. The 3.7% fall in orders from the eurozone together with the 5.7% fall in internal demand, underlines the contraction of the eurozone economy.

UK economy contracts – Consumer confidence unchanged

The NIESR GDP report caused the pound to reach a daily low of 1.4634, which proved that the economy deteriorated in the initial quarter. The present recession starts to show similarities with the 1979 contraction and although the British economy seems to recover, a worsening labor market will reduce outlooks for internal growth. Although economists forecasted that the consumer confidence would improve to 45, it remained at a 41 level, which shows the consequences of increasing job losses. In spite of the worsening recession, it is to be expected that the Bank of England will leave their 0.50% benchmark rate unchanged due to the only few available options. The pound could continue its weakness if the central bank indicates more quantitative easing actions.

Dollar continues to find support – End of housing crisis near?

Risk aversion is being stimulated by rising expectations of companies to report gloomy earnings for the initial quarter, while the greenback continues to find support. A turnaround in sentiment could be stimulated by rising lending and could add more positive data to the housing sector, which could indicate that the end of the housing crisis could be near. Many investors consider the improving situation of the housing sector as a key option for the US economy to reverse its present contraction. Today’s release of the FOMC’s minutes may get the most attention in order to get more data concerning the economy and the future measures by the central bank. Pessimism could be boosted and add support to the dollar if the outlook by policy makers turns out disappointing.