Thursday, 14 May 2009

US dollar strengthens as risk appetite fades

The euro weakened against the US dollar yesterday, finishing the day at $1.3599.
  • In early trading yesterday the euro strengthened slightly against the greenback after it was reported in the Financial Times that America’s AAA credit rating could potentially be downgraded. However, analysts urged caution on the article because the US has run a persistent and growing budget deficit for years, highlighting the huge economic, political and financial implications in the highly unlikely event a downgrade should ever take place.
  • News that the Bank of England had significantly downsized its growth forecasts for the UK reduced risk appetite in the market generally, with perceived “riskier” currencies like the euro suffering as a result. The BoE said it did not expect the UK’s economy to start growing until the middle of 2010, as well as forecasting a 4.5% year-on-year decline in economic growth at its lowest point.
  • The euro’s fall was further compounded by the news that retail sales figures in the world’s largest economy were unexpectedly down last month, diming optimism that an economic recovery may soon be underway. April’s reading of -0.4% was well below the 0% change analysts had expected in US retail sales, particularly after the 1.2% fall in March.
  • Heavy falls on global equity markets also did little to ease the euro’s plight yesterday afternoon, as investor confidence that a global economic recovery will soon be underway faded, encouraging them to look to the perceived safety of the greenback.
  • In trading so far today the euro has resumed its slide against the dollar as investor risk appetite continues to dim.
  • There is some important data due out today in both the US and the eurozone. In the latter, the ECB’s Monthly Report will be released at 09.00 BST, whilst in the former Month-on-Month Producer Price Index data for April is due at 13.30 BST.

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