Analysis / Daily / Finance / forex / Money

Another Crack in the Facade Hits Dollar

One Pound

Sterling rose to a two-month high against the dollar on Wednesday, just days before a British election that has so far put little of the expected pressure on UK markets. Most polls show the Conservatives and the opposition Labour Party neck-and-neck before the May 7 election, making a hung parliament likely. A month of uncertainty over the makeup and solidity of the government should follow. Analysts have played up the chance of volatile moves in the pound as a result. Prices of options guarding against such uncertainty soared in February and March. But one-month implied volatility has begun to retreat the closer the election gets. Sterling itself reached a two-month high of $1.5438 after weak U.S. GDP numbers on Wednesday. The U.S. GDP numbers dominated afternoon trade, pushing sterling 0.7 percent higher against the dollar and weakening it 0.4 percent to 72.10 pence per euro. Earlier, the pound had taken a boost from Nationwide data showing house prices rose much faster than expected and at the fastest monthly pace since last June, another sign the domestic market might be starting to regain momentum. Against the dollar, sterling is up 3.5 percent since last Wednesday, when minutes from the Bank of England showed the central bank thought the rate tightening priced in by markets was “exceptionally slow.” Whilst British investors might seem to be focussed on the election, international investors see the differences between the main parties as almost non-existent, which could explain why sterling was not weaker despite the uncertainty of the outcome. Still, some analysts say that currency investors will begin to see the dire political situation and get more jittery about the election as the date approaches.

euro

The euro continued its strong rebound against the dollar in recent days, moving to a two-month high as the Federal Reserve remained cautious on the timing of an interest rate hike following soft GDP data for the first quarter of the year. EUR/USD gained more than 1.5% on the session to settle at 1.1128, its highest level since Mar. 5. The pair is now up more than 2.5% since late last week, marking its sharpest five-day ascent since 2009.

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The dollar sank to a nine-week low yesterday after data showed the U.S. economy grew far slower than expected in the first quarter, reinforcing expectations for a gradual pace of interest rate rises by the Federal Reserve. The greenback, however, trimmed its losses after the Fed released its monetary policy statement following a two-day meeting. The dollar, though, was still on track to end the month lower after nine straight months of gains. The Fed acknowledged the soft patches in the U.S. economy, making it more likely it will not be ready to raise rates until at least September. But it did say the slowdown in the U.S. economic growth during the winter months was due partly to transitory factors, a statement that supported the dollar. The dollar index, a gauge of the greenback’s value against major currencies, hit its lowest level since late February, falling for the sixth consecutive day. Data on Wednesday showed the U.S. economy grew just 0.2 percent in the first quarter, down sharply from the fourth quarter’s 2.2 percent clip. The first-quarter reading was also much lower than market expectations for 1.0 percent growth. In late trading, the dollar index was down 0.9 percent at 95.217, reducing losses after the Fed statement. It dropped to 94.678, a nine-week trough, and has lost 4.5 percent over the last three weeks. Benefiting from the dollar’s losses, the euro climbed to an eight-week peak. It was last up 1.1 percent at $1.1102, supported by data showing lending to eurozone households and companies rose in March for the first time in three years.

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