The Swiss franc has risen by almost 40 per cent against the euro since Jan 2010 while the Japanese yen has surged by over 11 per cent versus the US dollar over the past 4 months. With both economies relying heavily on export trade but suffering from unwelcome safe haven demand for their respective currencies, the Swiss National Bank cut interest rates in a surprise meeting and was followed by Japan intervening in currency markets for the first time since March. Both actions had the desired effect with the franc and yen both tumbling across the board. Those factors supported the pound’s trade weighted index to two-month highs assisted by better than expected UK service sector data. In contrast though, the US dollar still remains vulnerable following another batch of troublesome US fundamentals. The Bank of England should hold rates at 0.5 per cent leaving investors uncertain on future policy until the meeting minutes are released. On the other hand however, the euro may fall should the European Central Bank provide any apprehensive rhetoric following their policy meeting with the area overwhelmed by government debt issues.
Sterling
The current risk-off sentiment is allowing sterling to make progress against more riskier rivals while the jump on the Swiss franc and yen pushed the pound’s trade weighted index to two-month highs. Adding to this more positive tone was an upbeat reading on service sector activity in the UK.
US dollar
The US dollar soared by over three per cent against the yen after Japan intervened in currency markets. Yet, despite this move, the US dollar still remains weak on US growth fears. A slowdown in growth in this area of the economy has created more uncertainty over the country’s economic strength, coupled with ongoing fiscal worries.
Euro
The euro’s declining momentum was checked, helped in large by action taken in Switzerland and Japan which allowed the single currency to retrace lost ground on the Swiss franc and Japanese yen. Comforting news on consumer spending across the eurozone also provided the euro with a lift. Expectations are that the European Central Bank could be forced to abandon their rate hiking cycle until next year as Italian and Spanish bond yields at near record highs are threatening an inflammation of the current debt crisis.
Japanese yen
Following the Swiss National Bank’s surprise currency weakening interest rate cut, Japan saw the perfect opportunity to intervene in currency markets for the first time since the March earthquake disasters. In order to protect exporters at home, the situation was becoming desperate as traders continued to pile into the yen, not on fundamentals but on safe haven demand.
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