After a week in which the Dollar gained against most currencies Friday’s session saw most currencies making small gains against the Dollar. The Pound was the exception dropping to lows of 1.4474, but the Euro, which took such a beating on Thursday, was up, reaching 1.2750. US economic data remained robust with non-farm payrolls up an unexpected 290,000 and consumer credit also up. These reports when added to a string of previous favourable reports are showing improvements in US fundamentals that support a view the US economy is starting to come out of recession.

   After a week of crisis the Euro actually ended the week strengthening against major counterparts, with rallies up to highs of 118.50 against the Yen and 1,2750 against the Dollar. A great international effort to help the Euro began on Friday, starting with EU members meeting in Brussels to try to prevent a ‘domino effect’ in the markets and the G7 also holding an emergency meeting to discuss the situation. EU Finance ministers met on Sunday to discuss emergency measures for stabilizing the markets by as soon as - ‘Monday morning’ A Portuguese government source said Lisbon had promised EU counterparts to cut their deficit by more than planned – to 7.3% rather than the original 8.3% - by amongst other things, suspending the building of a new airport for the capital; and the upper house in the German Parliament approved a bailout bill.

   The Pound weakened profoundly on Friday ending the day at 1.4800 to the Dollar and 0.8598 to the Euro. The results from the general election on Thursday showed a swing to the conservatives but not enough for outright victory, giving a hung parliament as was expected. The Liberal Democrat Party now hold the balance of power and they are currently in talks with the Conservatives to form a coalition but the two have very little shared ground so a quick deal seems unlikely. The markets sold off sharply at the news as investors feared no one party has the mandate necessary to push the difficult spending cuts through parliament which are seen as necessary to avoid a downgrading of UK debt. A small drop of 0.1% in the house price index added to doubts about the UK financial recovery.

   The Yen has powered up in value this week increasing by an average of 5% against most of its counterparts as appetite for risk declined and there was a rush to safe haven currencies. On Friday, however, the markets seemed to pause and the Yen gave up some of its gains, ending the session at 116.78 against the Euro and 91.60 against the Dollar. Investors are eagerly awaiting the BOJ statement on Monday for a response to the volatility. There are particular concerns regarding the detrimental effect a strong currency will have for Japan’s export led economy, as well as continued deflationary pressures.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst