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US dollar continues to slide on ECB and Fed stimulus

How much confidence do the markets have in the world’s central banks? A lot, if the latest changes in the exchange rates are anything to go by


Welcome to the Pure FX account of the latest changes in the foreign exchange rates, covering the 7th to 14th September 2012. 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:

UK pound to euro: 1.2601 to 1.2415 (-1.476%)
UK pound to US dollar: 1.5939 to 1.6198 (+1.625%)
Euro to US dollar: 1.2644 to 1.3047 (+3.187%)

The US dollar in particular lost an astonishing four cents against the euro this week, as investors remained upbeat about the European Central Bank’s bond buying scheme, while rejoicing on reports the Federal Reserve has announced more stimulus.

So, the US dollar has been losing out since late July now, and the euro climbing against the pound, on hopes these institutions will boost global growth.

What’s Affected The Rate This Week

As I mention, the markets remain hopeful about the European Central Bank’s bond buying scheme this week.

Last Thursday, ECB president Mario Draghi announced Official Monetary Transactions, a tool for him to buy Spanish and Italian government bonds in unlimited quantities, and so prevent these countries exiting the euro area. This led to an immediate lift in global confidence, as the ECB assured us the aid could be potentially endless.

This week meanwhile, Mr. Draghi himself expressed satisfaction with the market’s reaction, noting: “The announcement of the facility has contributed to raising confidence in the euro area, and in the euro across the world.”

Furthermore, the Federal reserve announced a third round of quantitative easing this week, contributing further to the common currency’s rise against its counterparts.

The decision reflects frustration inside the Fed at the slow pace of job creation in the US, and a renewed attempt to fix that as part of the central bank’s mandate. Fed chairman Ben Bernanke announced the Fed will purchase $40 billion in mortgage-backed securities each month, until such time as unemployment falls to acceptable levels.

Hence, the fillip to global confidence and the climbing euro.

What’s Going to Happen Next

There’s still a high probability that market confidence in the ECB scheme is misplaced, which could see the euro decline shortly.

This is because the ECB has made its bond purchases dependent on Spain and Italy first accepting a bailout, with all the austerity conditions that implies. Spanish prime minister Mariano Rajoy in particular has expressed distaste at this, telling RTVE, “I could not accept being told which were the concrete policies where we had to cut.”

If Spain rejects the proffered terms then, the European Central Bank scheme will never see the light of day. If the markets begin to suspect that could happen, these euro gains will be erased.

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.

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Peter 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
Category: Expats
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