Pound weakens as investors seek safe-haven of the US dollar

The pound weakened slightly against the dollar yesterday following fears that an outbreak of swine flu in Mexico could turn into a global pandemic. As a result, investors took pre-emptive action by dumping travel and leisure stocks, with British Airways share price finishing the day down 7.4%, whilst travel group Thomas Cook lost 4.3%. Top economists fear that in the worst case scenario, a swine flu pandemic could cost the world economy $3 trillion in lost output, equivalent to 4.8% of world GDP, significantly hampering a global economic recovery. As a result, investors dumped sterling in favour of the perceived safety of the greenback in order to reduce their exposure.

In early trading, sterling lost ground against the dollar as concerns surrounding the UK’s ballooning debt and struggling economy continued. As revealed on Friday, the British economy shrank by 1.9% in the first three months of 2009, the biggest fall since the third quarter of 1979 and much worse than the 1.5% contraction analysts predicted. The figure cast fresh doubt over Chancellor Alistair Darling’s growth forecasts announced in his budget last Wednesday, predicting an optimistic 1.25% growth next year and 3.5% in 2011. In addition, Mr. Darling’s announcement that the UK will run a budget deficit of 12.4% of GDP for the coming fiscal year, as well as issue a record £220 billion of gilts, has continued to weigh on investors’ mind and, as a result, they have looked to the perceived safe-haven of the dollar to reduce risk. Later in the day, news that there were suspected cases of swine flu in the UK, Canada and elsewhere further exacerbated this flight to safety. Moreover, property data company Hometrack’s monthly report for April did little to cheer investors, as it confirmed house prices in England and Wales fell by 10.1% compared with a year ago, a modest improvement on the 10.3% fall in March. Although the markets largely shrugged off this data, it no doubt contributed to the weakening of the pound against the dollar as again investors looked to the perceived safety of the greenback to reduce risk.

Investor risk aversion also increased following comments by Lawrence Summers, director of the White House National Economic Council, who said the US economy will experience “sharp declines in employment for quite some time this year,” on Sunday night’s Fox News Sunday. His assessment came just two days before a crucial report in the US is due, which analysts expect to show a 4.7% contraction in the world’s largest economy in the first quarter of 2009. There was also further disappointing news in the UK property market later in the day, as a Mortgage Approvals report released by the British Bankers’ Association (BBA) showed the first drop in mortgage lending by the country’s major banks for four months in March. The number of mortgages approved for house purchases last month fell 6.8% from February to 26,097, although the BBA did say they expected fluctuations during a recession. Nevertheless, more negative news from the housing market did little to improve investor confidence that it may be on the cusp of a recovery, and together with concerns over the severity of the swine flu outbreak and the other data released throughout the day, the news caused sterling to weaken against the dollar, finishing the day at $1.4646.

There is an important Consumer Confidence survey due in the US today at 15.00 BST, however all eyes are likely to be on the swine flu story today to see if there are any more confirmed cases.

Euro loses ground to the US dollar

The euro weakened against the US dollar yesterday as investors flocked to the safe haven of the dollar, predominantly due to fears arising over the global outbreak of swine flu. World health officials said yesterday that the virus was suspected in up to149 deaths in Mexico, with more than 1,600 cases reported, while 50 cases — none fatal — were confirmed in the United States, six in Canada and several in Europe, including 2 in the UK.

Shares in travel companies were worst hit by the outbreak of swine flu, with Thomas Cook, TUI, British Airways, Intercontinental and Carnival all trading sharply lower on fears that travel plans will be affected by concerns of the epidemic becoming a pandemic. But London fought back from early swine flu-related losses to track Wall Street higher on hopes a new restructuring plan from GM will help it avoid bankruptcy. However, worries have arisen that automaker Chrysler could be filing for bankruptcy if it does not agree a deal with Fiat by April 30.

Data released in the eurozone yesterday saw the German May GfK consumer sentiment index remain steady at 2.5, but riskier currencies came under pressure because of media reports about the extent of the toxic asset problem in German banks, and growing attention on public debt in countries such as the UK.

Investors are now eagerly awaiting the final outcome of the US Federal Reserve’s meeting taking place today and tomorrow, as well as quarterly earnings released by major banks. Investors also await the outcome of stress tests for US banks, scheduled to be announced next week. The tests involve a capital buffer to assist banks in overcoming a 3.3% economic contraction in 2009. Additionally, the ECB will be announcing their interest rate decision on May 7 where they are expected to cut interest rates by 25 basis points and possibly announce quantitative easing measures to combat the recession.

There are several announcements taking place in the US today, including S&P/Case-Shiller Home Price Indices, Consumer Confidence, Richmond Fed Manufacturing Index and ABC/Washington Post Consumer Confidence. There are no significant announcements taking place in the euro zone today.

New Zealand dollar has mixed day

The New Zealand dollar had a mixed day, gaining ground against the aussie but losing some ground to the pound. The Swine flu pandemic dominated trading overnight. Markets will continue to remain focused on Thursday’s Reserve Bank of New Zealand rate decision, with investors expecting a 50 basis point rate cut. The central bank’s statement will also be eyed for clues on how long interest rates will remain at a low level.

Australian dollar undermined by fears over swine flu

The Australian dollar weakened against sterling yesterday, as fears the swine flu virus may spread globally saw yet another threat which could hinder a world economic recovery. The aussie relies heavily on commodities for its export income and usually remains vulnerable to possible threats to world trade. The flu virus caused higher risk aversion, which has generally overridden economic data. UK figures released revealed house prices in the UK fell by 10.1 percent in April compared to 12 month ago.

Pound undermined by outbreak of swine flu

A deadly outbreak of swine flu has killed more than 100 people in Mexico, with infections reported in the US, Canada and possibly six other countries. Uncertainty over the scale of the outbreak has cranked up risk aversion, hitting higher-yield currencies like the euro and sterling, whilst at the same time boosting the dollar and the yen as a safe-haven play. Global equity markets have also been affected by the outbreak this morning, with airline, holiday and leisure stocks all taking a particular hit. It would appear that only once the extent of the outbreak is known, or authorities start to bring it under control, will investor jitters on this issue subside.

Pound loses ground to euro following worse than expected GDP

The pound weakened against the euro on Friday, as improved investor confidence in the eurozone increased appetite for the single currency. In Germany, the IFO Business Climate index survey showed a better-than-expected rise to 83.7 in April, up from 82.2 the previous month, fuelling investor confidence that the eurozone may be coming tentatively out of recession. In the UK, GDP figures released by the Office of National Statistics showing that the economy had shrunk by 1.9% in the first quarter of 2009 further called into question Chancellor Alistair Darling’s optimistic growth forecasts, announced in his budget last Wednesday. The Chancellor predicted that the UK economy would grow by 1.25% next year and 3.5% in 2011, but the worse-than-expected GDP data cast fresh doubt over his predictions. It represented the biggest quarterly decline in the UK’s GDP in thirty years, and the country’s third consecutive quarter of negative growth, prompting investors to dump sterling as their confidence that the UK may be coming out of recession dwindled. There was also continued doubt in the City over the credibility of the Chancellor’s new 50% tax rate on those earning £150,000 or more, with many fearing that the top financial services talent will look elsewhere to ply their trade. With the UK economy so dependent on the banking and financial services industry, some analysts worried over the long-term implications of such a tax rise, potentially making it much harder for the UK to get out of recession going forward. As a result of these investor jitters, together with improved investor sentiment in the eurozone, sterling weakened against the single currency over the day, finishing at 1.1082, down from 1.1198 at the start of the session.

In early trading today, the pound has continued to weaken against the euro ahead of important housing data released later today. The Nationwide Housing Price figures are expected to report a further 15.8% fall Year-on-Year for April, fuelling fears that the UK housing market may have some way to go before it bottoms out. In the eurozone, President of the European Central Bank Jean Claude Trichet’s speech at 17.45 BST will be of particular importance to investors as he may give some indication of what steps the bank intends to take at the next meeting.

Pound undermined by worse than expected GDP figures

The pound weakened against the dollar on Friday, wiping out much of the bounce it enjoyed the day before. In early trading, the pound lost ground against the dollar following an article in The Daily Telegraph suggesting the UK could lose its AAA credit rating after rating agencies outlined their concerns over the UK’s ability to service its public debt. If the UK were to suffer the embarrassment of having its rating downgraded the cost of sovereign borrowing would increase, making future tax and interest rate rises more likely. The pound then suffered furthered losses against the greenback after figures released by the Office of National Statistics showed the UK economy had shrunk 1.9% in the first three months of 2009. The figure was much worse than the 1.5% contraction analysts had predicted, and represented the biggest decline in GDP since the third quarter of 1979. It was the UK’s third consecutive quarter of negative GDP growth, confirming that the country remains mired in deep recession. The worse-than-expected figures cast fresh doubt over UK Chancellor Alistair Darling’s optimistic growth forecasts announced in the budget last Wednesday, and therefore many investors sold sterling in favour of the perceived safe-haven of the US dollar.

Later in the day, however, better-than-expected US Durable Goods Orders data, down at -0.8% rather than the predicted -1.4%, sparked a rally for the pound as investors’ appetite for risk improved. The pound’s recovery was also aided by overseas central banks and model funds buying into the currency as part of their regular reserves management. However, worse-than-expected housing data eventually cancelled out sterling’s gains as investors realised the US economy may yet have further to contract. Month-on-month New Home data released by the US Census Bureau revealed that sales of single-family homes in March decreased by 0.6% to a seasonally adjusted annual rate of 356,000 in comparison to February. The decline was the fifth in six months and added to investor wariness that the all-important US housing market may yet have further to fall. This news, together with other data released during the day, meant the pound finished down against the dollar at $1.4676, having started the day at $1.4721.

In early trading today, the pound has weakened markedly against the dollar as investors brace themselves ahead of the release of important UK Nationwide House Price data, expected to show a fall of 15.8% Year-on-Year for April. There are no major announcements in the US today.

Euro continues its rise against the US dollar

The euro continued its rise against the dollar on Friday, finishing at $1.3240 up from $1.3142 at the start of the day. In early trading, the euro rose against the dollar after a key survey of German business confidence indicated tentative signs of recovery in the eurozone economy. April’s IFO Business Climate index survey showed a rise to 83.7 from 82.2 the previous month, much higher than the 82.3 analysts expected. As a result, investor risk aversion weakened and they bought into the euro, taking it to a one-week high against the greenback. This shift in favour of the single currency was also aided by the announcement that French consumer spending for April was stronger than expected. In the US, ongoing concerns over government stress tests on US banks further contributed to the euro’s gains over the dollar, as investor jitters over whether there may be further bad news to come weighed on their minds.

Interestingly, Ford’s admission that they had lost $1.43bn in the first quarter of 2009 did little to dissuade investors from buying into riskier currencies, primarily because that was far less than the $7.2 billion the company had lost in the last three months of 2008. It is now targeting 2011 to break even. The dollar’s slide against the euro was further extended after better-than-expected data released by the US Census Bureau reduced investors’ risk aversion. Their Durable Goods Orders data for March stood at -0.8%, much higher than analysts had predicted, and therefore investors looked beyond the perceived safe-haven currencies. Worse-than-expected property data from the US did little to stem the euro’s gains, despite signs that the housing market continues to slow. New Home Sales in March were reported at -0.6%, far weaker than the 0.9% growth predicted by analysts.

In early trading today the euro has pared some of the gains it made last week, following news over the weekend that Spain’s unemployment rate hit 17.4% at the end of March, double this time last year. There is also wariness in the market ahead of the President of the European Central Bank’s speech at 17.45 BST today. Investor’s will be studying Jean Claude Trichet’s words carefully as they try to decipher what measures he intends to implement to get the eurozone out of recession. As a result, there has been a flight to the perceived safe-haven of the greenback this morning as investors look to reduce risk. There are no major announcements due in the US today.

New Zealand makes gains against the pound

The New Zealand dollar finished the week stronger against both sterling and the aussie, however offshore trading has seen the kiwi weaken and open lower against both. The Reserve Bank of New Zealand’s decision on Thursday will take centre stage this week, with markets predicting a 50 basis point cut.

Australian dollar makes substantial gains against sterling

The Australian dollar appreciated heavily against sterling on Friday, after data showed the UK economy’s fall in the first quarter was its fastest in 30 years. Britain’s first quarter gross domestic product fell 4.1% year on year, the biggest annual drop since 1979. The latest figures mean that GDP has now shrunk for three quarters in a row, and confirm that the economy is still deep in recession. Sterling also came under pressure after The Telegraph newspaper reported that ratings agencies were concerned about Britain’s rising debt levels. Earlier last week, the government said that the national debt would reach 1.4 trillion pounds during the next five years.