The US dollar shot to 22-month highs against the euro and Swiss franc this week despite the start of US air raids on Isis in Syria. Recently, the driving force behind currency markets has become relatively simple. On the one hand, the US economy appears to be experiencing a steady recovery, while on the other the eurozone appears to be on course for another downturn, while at the same time experiencing downside price pressures. Fears over the health of the global economy continued to be fanned by a weak PMI survey in China. While the survey remained in expansion, the pace of expansion was limited and rumours emerged over the possible replacement of the head of the Chinese central bank. Next week, China will be closed for several days, which will help to limit volumes during the Asian sessions.

Euro

Currency markets were rattled by comments from several ECB policymakers including Draghi, who continued to suggest that the central bank was prepared to take additional extraordinary measures in order to attain its mandate of price stability. The comments come at a sensitive time as investors look down the road to the flash inflation figures and policy meeting. As a result, investors went short of the euro in anticipation of a possible announcement. A eurozone consumer confidence survey dropped more than expected, but more important was the decline in Germany’s Ifo business sentiment survey, which recorded levels not seen in one-and-a-half years.

Sterling

Sterling’s fate hinged upon the outcome of the Scottish vote for forecast. Luckily the currency and the country survived the vote for independence and this week was one of digestion. The euro’s general decline allowed an opportunity for sterling to take back its losses in the run up to the referendum and landed it at two-year highs against the single currency. Sterling struggled to fight against a rising US dollar. Public sector net finances saw the government actually borrowing more this year than at this point last year. Comments from one BoE policymaker suggest that if wages increase without growth in productivity, then rate increases could come faster and stronger than markets currently are pricing in.

US dollar

There were several Federal Reserve policymakers giving comments this week. One policymakers seemed to suggest that it would be ‘natural’ to remove the ‘considerable time’ phrase out of the FOMC’s communique at next month’s meeting. The comments alongside economic data helped propel the US dollar to fresh heights against the euro. While housing starts and existing home sales fell below forecast, the release of new home sales figures offset any concerns. Sales rose to levels not seen in six-years.