Dollar main beneficiary of market turmoil according to Bank of Ireland
– Flight to quality boosts Dollar
– Euro not weak across the board
– 50bp ECB rate cut likely near term
The recent pronounced deceleration in growth across the major economies, allied to the ongoing concerns about a Greek sovereign debt default, have prompted investors to cut back on risk and fuelled a high degree of volatility in financial markets. The Swiss franc normally benefits from such an environment but it has fallen sharply, following the decision by the Swiss authorities to set a ceiling for the currency against the euro, in order to prevent further appreciation and hence further damage to Swiss competitiveness according to Bank of Ireland’s latest Bulletin which was published today, 5 October 2011.
Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “This has left the Japanese yen and the US dollar as the winners in the currency markets over the past month, with the latter outperforming all the major currencies despite the Fed’s commitment to keeping rates extremely low for the next two years and in the wake of an S & P downgrade. The recent US data has also generally been better than expected, indicating that growth in the third quarter probably accelerated relative to Q2, although it is unlikely to be strong enough to precipitate a significant increase in US employment.
“The euro has fallen sharply against the dollar, to around €1.32 from €1.45 in early September, but despite the turmoil in the euro sovereign debt markets, the single currency has not fallen precipitously against the other major currencies. It has drifted lower against sterling, to below 86 pence, but has risen against the Swiss franc, the ‘commodity currencies’ and most emerging market currencies with the result that its trade-weighted index is still above its level at the end of 2010.
“The euro’s appreciation in the first half of 2011 was due to the ECB’s hawkish monetary policy stance but that has now changed and we would not be surprised to see the repo rate cut from the current 1.50% back to 1% in the near term. That expectation has put downward pressure on the euro and in our view it is relative interest rates which have driven the currency rather than the sovereign debt issue. On that basis lower ECB rates may well keep the euro nearer $1.30 than $1.40 in the near term and our FX model also projects a lower euro/sterling rate of 85 pence“, concluded Dr. Dan McLaughlin.
Dr. Dan McLaughlin Anne Mathews
Group Chief Economist Media Relations Manager
Bank of Ireland Global Markets Group Communications
Tel: 01 609 3221 Bank of Ireland
Tel: 076 623 4771 / 087 246 0358