Pound holds up against battered euro despite gloomy economic data

Dubai: Currencies have closely tracked equity prices for direction in recent months, with falling stocks boosting demand for the dollar and yen, which are often seen as safer places to park money in times of heightened risk aversion.

The combination of a slightly stronger tone to the financial markets, long overdue changes in the accounting rules, and economic news that ranged from no worse than expected to slightly better than expected, has unleashed the first significant bit of optimism we have seen since the onset of the financial crisis.

While this marks a change, the recession is clearly not ending. The absolute worst of the downturn is probably behind us, with the fourth quarter of last year and first quarter of 2009 probably marking the largest declines in real GDP.

The important event of the week was that the Bank of Japan (BOJ) kept its rates steady at 0.1 per cent as expected.

The Nationwide Building Society said its consumer confidence index fell to 41 last month, matching the series low hit in January, from 43 in February.

Separate data showed Britain's economy probably shrank by 1.5 per cent in the first three months of this year after a 1.6 per cent decline in the last three months of 2008.

Fitch Ratings has lowered the Republic of Ireland's long-term foreign and local currency Issuer Default Rating (IDR) to 'AA+' from 'AAA' and the BoE concluded a two-day policy-setting meeting leaving rates unchanged.

The latest economic data shows investors seem to keep cherry-picking data, latching on to those that offer a glimmer of hope and ignoring those that remind of risks to the outlook.

In the bigger picture, global trade continues to plunge, as seen in the sharp narrowing in the February US trade deficit, where non-oil imports fell by another -5.5 per cent MoM. China's March trade report purportedly revealed signs of improvement, as Chin-ese exports were down only -17.1 per cent year on year from February's -25.7 per cent year on year decline.

The euro came under selling pressure after data showed the euro zone economy recorded its deepest-ever quarterly fall in the fourth quarter of 2008.

The euro traded lower, pressured by reports of worse than expected EU GDP. The downward revision in EU GDP reflects a drop in household consumption, investment and export sales. The GDP report suggests that the EU economic outlook continues to deteriorate and the risk of deepening EU recession is rising.

The market has been watching for signs the ECB will take unconventional steps to improve credit after similar moves by the Federal Reserve and other major central banks to keep longer-term interest rates down and help lift their economies from recession.

Range for previous week: $1.3088 - $1.3581 (Dh4.8072 - Dh4.9883)

Range for this week: $1.2900 - $1.3050 (Dh4.7381 - Dh4.7932)

The pound slipped at the start of the week after figures showed that UK manufacturing output fell 0.9 per cent on the month in February, marking the 12th consecutive month of declines. UK shares have retreated following a rally, when optimism that global economic weakness may be bottoming out and a perceived positive outcome from the G20 summit boosted risk demand. But the pound held up against a battered euro on views that the euro zone economy may fare even worse than the UK economy.

The BoE held a policy-setting meeting on Wednesday and Thursday, where it left rates unchanged and continued its £75 billion bond buying scheme. UK economic data showed a mixed picture, with British consumer confidence slipping in March as people fretted about rising job losses and a deepening recession.

Range for previous week: $1.4579 - $1.4958 (Dh5.3548 - Dh5.4940)

Range for this week: $1.4700 - $1.5000 (Dh5.3993 - Dh5.5095)

The Japanese yen hit its lowest levels in nearly six months against the dollar and the euro on start of the week as investors' risk appetite grew. Yen benefited from defensive position-taking as a flush of optimism that powered a recent rally in stocks and higher-risk currencies gave way to caution about banks.

In the last few days the yen was well supported as falls in share prices and investors hesitated to return to riskier assets ahead of earnings reports by major US banks this week.

The Japanese government formally presented an economic stimulus plan on Friday with spending of 15.4 trillion yen.

Range for previous week: 99.31 100.45 yen (Dh0.036985 to Dh0.036565)

Range for this week: 99.00 to 102.00 yen (Dh 0.0360 - Dh0.0371)