Daily currency report

The US dollar index dropped to near 15-year lows after European finance ministers agreed to details surrounding a permanent bailout fund that will replace the current European Financial Stability Facility by 2013. The news was also followed by hawkish comments from ECB President Jean Claude Trichet, who reminded markets that the central bank remained ‘strongly vigilant’ on inflation. The comments come despite the disaster in Japan and recent no-fly zone imposed on Libya. The escalating geopolitical tensions continue to place upside pressures on the price of oil, which is weighing on any dollar advance. Furthermore, economic data in the US confirmed the weakened state of the housing market.

Sterling

The pound opens near two-week highs, but gains against the euro have proven harder to come by. Sterling has advanced in front of the release of CPI. Consumer prices are expected to remain well in advance of the central bank’s two per cent inflation target. A rise in the country’s VAT as well as higher food and energy prices are expected to exhort upward price pressures with a forecasted rise of 4.2 per cent year-on-year expected. Anything above expectations would give further strength to sterling, but gains could be capped in front of the release of the Bank of England minutes and Chancellor Osborne’s presentation of the 2011 budget.

US dollar

The US dollar index dropped to 15-year lows. Economic data released in the US confirmed weakness in the housing sector of the economy remains a problem. Existing home sales dropped by nearly 10 per cent in the month of February. The soft economic data combined with the view that the Federal Reserve will maintain its ultra-loose monetary policy for an extended period will keep the dollar attractive as a funding currency for carry trades.

Euro

The euro found good support rising against most major currencies. The euro’s rise came about after EU government officials announced that they have agreed upon a new fund of €500 billion, which will take over the role of the current EFSF by 2013. While markets had known that the European Finance Ministers were working on the fund, it seems an agreement has been reached on where the money will come from and what the conditions will be to access the fund.

Japanese yen

Trade in the yen continues to be extremely cautious after the Group of Seven industrialised nations conducted joint interventions in currency markets to weaken the yen last week.

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