Euro zone weakness makes investors favour dollar

Dubai: The past week saw increased volatility in currency markets. The US unemployment rate increased to 6.1 per cent while non-farm payrolls dropped by 84,000 in the last month. After the news was released, the euro rebounded from the week's low at $1.4195 to $1.4320.

Despite the bad news from the US labour market, investors still seem to favour the dollar. It has to do mostly with the weakness of the European economy.

Euro

The European Central Bank kept interest rates on hold at 4.25 per cent as expected on Thursday, faced with a difficult mix of weak economic activity and strong inflation.

The ECB on Thursday unveiled tougher rules on the assets banks can submit as collateral in central bank lending operations.

The changes would make it less attractive for banks to use asset-backed securities as collateral and would push up the overall cost of borrowing funds from the ECB, which lends banks on average more than 400 billion euros a day.

Financial markets on Friday reconsidered the likely course of Federal Reserve rate policy. Short-term interest rate futures, which show market sentiment toward Fed policy, now price in a small chance for a rate cut by year end, after suggesting for months that the Fed's next move would be a rate increase. The Federal Open Market Committee meets on September 16 to consider its next move on interest rates.

Rate futures are fully priced for the Fed to hold rates steady at two per cent this month, by year-end, futures show a small chance around 10 per cent that the Fed will cut rates to 1.75 per cent.

Range for previous week: $1.4195-$1.4717 (Dh5.2138- Dh5.4056). Range for this week: $1.4095-$1.4441 (Dh5.1756-Dh5.3041).

Yen

It is a known fact that risk sentiment remains the primary driver of the Japanese yen because reactions to political turns, oil and Japanese economic data have been absolutely irrelevant, and the low-yielding currency has remained strong against its foreign counterparts.

This remains the case, as the currency gained across the majors, but especially so against the high-yielding kiwi and Aussie dollars. With global credit risks remaining high and equity markets susceptible to sharp decline, traders are de-leveraging and pulling money out of carry trades.

Furthermore, calls by Pimco manager Bill Gross for the US government to bail out mortgage lenders like Fannie Mae and Freddie Mac rattled investor confidence, as he suggested lack of action would lead to a "financial tsunami."

Downside potential remains for the credit and equity markets, and as a result, the bias for the Japanese yen going forward versus most of the majors remains bullish.

Range for previous week: 105.51 yen-109.18 yen (Dh0.033642- Dh0.034812). Range for this week: 106.19 yen-109.29 yen (Dh0.033598 -Dh0.034588).

Sterling

Sterling rose across the board on Friday, boosted by broad losses in the dollar after a jump in the US unemployment rate fuelled nagging worries on the state of the world's biggest economy.

The UK currency pulled back from a two-and-half-year low against the dollar hit earlier in the day, but sentiment remained downbeat on a view that the domestic economy is deteriorating fast and raising the chances of monetary easing this year. The pound rose as high as $1.7744, boosted by the US jobs data.

It edged higher against the euro, which fell 0.3 per cent to 80.70 pence, but the single European currency stayed near a record high of 81.86 pence hit on Thursday. Money markets are pricing in a good chance of three quarter-percentage point cuts by this time next year.

Recent economic news in Britain has been unremittingly grim.

Range for previous week: $1.7535-$1.8126 (Dh6.4406-Dh6.6577). Range for this week: $1.7484-$1.7843 (Dh6.4201-Dh6.5537).