US dollar loses out after ECB unveils its rescue scheme
The US dollar was the biggest loser last week, shedding almost 1.00% against the UK pound and euro, and continuing a trend that started in early August.
Welcome to the Pure FX account of the latest changes in the foreign exchange rates. This is intended as a brief guide to movements in the exchange rates this week, to put you in the best position when you exchange currencies.
Exchange rate changes
GBPEUR: 1.2621 to 1.2601 (-0.158%)
GBPUSD: 1.5789 to 1.5939 (+0.95%)
EURUSD: 1.2554 to 1.2644 (+0.717%)
As you can see above, the US dollar was the biggest loser last week, shedding almost 1.00% against the UK pound and euro.
This continues a trend we’ve seen since early August, when the buck started to slide against its counterparts, as expectations that the European Central Bank would act to “preserve the euro” boosted global optimism. Last week, we saw the culmination of that.
What’s affected the exchange rates
There was only one show in town last week, and that’s ECB president Mario Draghi’s announcement of his bond buying scheme to shore up the euro. Called Outright Monetary Transactions (OMTs), the scheme involves buying Eurozone government bonds (likely Spanish and Italian bonds) to spare these countries the headache of financing themselves while they reform their economies.
The plan has been met with adulation from the financial markets because, until now, there’s been nothing to ensure Spain and Italy et al. remain in the euro, given the intense financial pressures under which they find themselves. Hence, the rapidly falling US dollar, which tends to fall in times of global optimism, in favour of the pound and euro.
How this affects you
The announcement of OMTs is of immediate benefit if you plan to buy US dollars. This is because, as the buck falls, you can therefore buy more of it when you exchange your UK pounds or euros.
That makes buying a home in the United States less expensive, for instance, which is good to know if you’re emigrating, while it also benefits you if you want to import US products back home.
What’s going to happen next
Mario Draghi’s plan to buy government bonds is not without its controversies. For instance, Jens Weidmann, head of the Bundesbank, calls the scheme “tantamount to financing governments by printing banknotes.”
This refers to the idea that, if the ECB is buying bonds, it’s essentially helping the Spanish and Italian governments finance themselves. Now, since the European Central Bank derives its funds from seventeen countries in total, that means funding Spain and Italy with euros taken from Greece, Ireland, and especially Germany.
Given this, it’s quite possible OMTs could face a legal challenge in the short-term, which prevents them being implemented. That would see the US dollar climb again.
There is also the issue of conditionality. To make his scheme palatable to Germany, Mr. Draghi has made it conditional on Spain and Italy requesting a bailout from the Eurozone rescue fund, the ESM. This would come attached with all kinds of austerity demands, needed to ensure the Germans that southern Europe isn’t making off with its cash.
But will Spain and Italy accept these terms? Speaking at a press conference for instance, Spanish prime minister Mariano Rajoy said, when asked if he would accept a bailout, “When there is news I will tell you. I haven’t had time to read Draghi’s speech yet.” Non-committal as ever in other words.
This raises the distinct possibility that, even with OMTs in place, they’ll never be used, because pride (or whatever personality trait) prevents Mr. Rajoy taking up the offer. That too could see the US dollar climb again.
Find out more: To find out more about what’s affecting your foreign exchange transfers, simply fill in your details into the form below. I’d be delighted to answer any questions you may have.
Next: US dollar continues to slide on ECB and Fed stimulus
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Pure FXPeter Lavelle is an economist at foreign exchange broker Pure FX. For a free no-obligation quote regarding changing currencies, get in touch at foreign exchange specialist Pure FX.
Copyright: Peter Lavelle, Pure FX
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