Analysis / Daily / Finance / Money

Euro/Dollar, How Low Can You Go?

The British pound continued to trade lower against the U.S. dollar while GBP/EUR benefited from the euro weakness climbing to the new high of 1.4158 this morning. As investors bring forward bets on the timing of the Bank of England’s first interest-rate increase since 2007, the U.K. locked in record-low borrowing costs for the next 53 years. The Debt Management Office auctioned 1.5 billion pounds ($2.3 billion) of government bonds due in July 2068 yesterday. The securities were sold to yield 2.623 percent, compared with the previous record-low auction yield of 3.28 percent for equivalent-maturity debt set in 2012. Benchmark 10-year gilt yields dropped the most since October yesterday, while the pound strengthened through 71 pence per euro for the first time since December 2007 as the European Central Bank’s extended bond-buying plan entered a second day. Locking in lower borrowing costs is increasingly important for the U.K. government, as concerns of an uncertain election outcome in May have helped make gilts the second-worst performing developed-bond market this year.

The euro hit a new 12-year low amid the bond buying this morning on the back of the ECB chief Draghi speaking. The single currency is poised for its biggest ever quarterly decline, providing a boost for export-focused companies. European stocks climbed, rebounding from a two-day loss, as the region’s central banks entered their third day of buying sovereign bonds. The Stoxx Europe 600 Index rose 0.5 percent to 391.47 at 8:05 a.m. in London. European stocks fell yesterday as energy shares slid, and concern grew the Federal Reserve is nearing an interest-rate increase. (The Fed next meets on March 17-18.) Euro-area central banks have bought German, Belgian, French, Italian and Spanish bonds this week, sending borrowing costs across Europe to record lows. The European Central Bank is purchasing the securities as part of an asset-buying program amounting to 60 billion euros ($64 billion) a month, known as quantitative easing. ECB President Mario Draghi signaled last week that the policy will choke off the threat of deflation.

The  strongest dollar in nearly 12 years versus the euro and the spectre of higher U.S. interest rates fuelled a selloff in global equities that sent the Standard & Poor’s 500 Index down the most since Jan. 5. Oil and copper also declined. The S&P 500 fell 1.7 percent by 4 p.m. in New York, slipping below its average price for the past 50 days and erasing its gains in 2015. The Dow Jones Industrial Average lost 333 points, also its biggest slide since Jan. 5. U.S. crude slid below $49 a barrel while copper dropped the most since January. Federal Reserve Bank of Dallas President Richard Fisher said the central bank should begin to raise rates as the labour market improves. While policy makers from Sydney to Tokyo, Zurich and Frankfurt are cutting rates and buying government bonds to stimulate growth, the Fed stands out in accepting a higher exchange rate as a sign of economic strength. The dollar has rallied this year versus 15 of 16 major counterparts. The U.S. benchmark retreated 1.6 percent last week, the most since January, as data showed the U.S. jobless rate had fallen to within the Fed’s range for what it considers full employment. Policy makers next meet on March 17-18. The index has entered the seventh year of a bull market, pushing valuations to near a five-year high. It is now down 0.7 percent in 2015. The dollar rose against all but two of its 16 major peers yesterday while the yen touched its lowest price in 7 1/2 years. The greenback climbed to parity with Switzerland’s franc for the first time since the Swiss National Bank removed a currency cap against the euro in January.

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