Euro, Pound Rise on China Comments

The euro weakens overnight on speculation China is looking to diversify its euros holdings. But later comments from China allay those fears, sending the euro and pound higher.
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By Joe Manimbo of Travelex

NEW YORK (

TheStreet

) -- The pound starts the day back up toward the highs of the week against the dollar. The euro weakened in overnight trade over speculation China was looking at diversifying its euro-denominated reserves. But comments coming from China in early trading have alleviated these fears, and the euro has bounced back up against the dollar, taking the pound higher with it.

U.S. new-home sales yesterday pleased the market by coming in well above expectations and posting their highest level in almost two years. Durable goods orders also saw an impressive rise to 2.9% in April.

The overall story in the market remains the same. Sentiment looks set to continue to drive currency movements as investors monitor developments in Europe and Asia and their resulting impacts on the financial markets.

GBP

: The pound experienced a calmer session on the exchanges on Wednesday. Signs that central banks, particularly the

Federal Reserve

, may reduce credit lines in the near future unsettled the pound during the morning session.

It was able to relax back as the threat of risk aversion waned somewhat on mortgage data. Mortgage approvals showed an increase of 15.5%, with the amount of lending rising by 1.825 billion pounds in April. An Organisation for Economic Cooperation and Development (OECD) report said that the U.K. would have to look to increase interest rates to curb inflation, another supporting factor for the pound. However, Bank of England Governor Mervyn King has stressed that these inflationary pressures are due to temporary measures and that the rate of inflation will fall back into line in due course. With no major data due out in the U.K. today, the pound is likely to trade off market sentiment.

USD

: The dollar story of late is that of a strengthening currency supported by a recovering U.S. economy and risk aversion. Markets have been particularly spooked by the debt and banking woes in Europe and, more recently, by the unrest in Asia, which has seen safe-haven inflows to the greenback.

The dollar was given an additional boost yesterday when U.S. new-home sales posted their best reading in nearly two years. Sales were expected to come in at 430,000 but instead posted a gain of 504,000, the highest since May 2008. In addition, the March 2010 numbers were revised upward as well. T

These numbers were expected to be strong as buyers rushed to cash in on a tax credit incentive which expires at the end of this month. It is expected that a clearer picture of the U.S. housing market performance will emerge after the incentive expires.

U.S. durable goods rose 2.9% in April, more than markets forecast, and triggered a wave of risk buying.

EUR

: The euro's situation remains the same. Continuing debt concerns and European banking sector worries are still making investors reluctant to buy the euro.

Risk direction changed throughout the day yesterday, leading to a volatile session for the single currency. Yet when calm descended on the markets and equities firmed, the euro was unable to capitalize.

German consumer sentiment and French consumer spending data disappointed to the downside which was not surprising as the crisis in the eurozone rolls on. These data did not move the market and were largely ignored after central bank comments.

European Central Bank officials stressed their focus on price stability and that they would take measures to calm any threat to their monetary policy. In addition, they commented that extending the bond purchase program was not a change in monetary policy but a required emergency measure.

The OECD release its latest economic outlook, and its chief economist said a drop in the euro's value should help to resolve the debt crisis. The euro came under renewed pressure toward the end of the U.S. trading day as did equities on the news that China was reviewing its European bond holdings. There may be potential upside for the euro in position-squaring ahead of the long weekend, but analysts suggest the overall outlook remains negative.

JPY

: The yen remains one of the go-to risk-aversion currencies in the current climate. This was highlighted by data showing fellow safe-haven currency the dollar had moved upward against all major currencies except the yen.

Data overnight showed that Japanese exports posted their fifth straight month of gains, rising 40.4% in April from a year earlier and better than the forecast of 38.9%.

Interestingly, exports to the eurozone were not impacted by the strength of the yen or, indeed, the weakness of the euro, although some warn that the impact will be felt if there is no turnaround in the European debt crisis.

Risks to the yen include the ever-present threat of verbal intervention as seen last week by Finance Minister Naoto Kan. This may be triggered if the strength of the yen starts to eat away at exports, which would damage the improvements to numbers seen over the last few months.