Weekly Round-Up: Euro Rally Runs Out of Steam

on Jun 12, 2012
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In a currency update from June 12 the Financial Times reported that risk-on currencies climbed from the previous day’s lows. The Euro (EUR) was up 0.4 per cent against the U.S. dollar at $1.2520 but remained below its Monday’s high of $1.2647. Commenting on the Euro rally, currency analysts said that as traders hold record short positions on the single currency, it is very likely for the Euro to climb higher on the back of any positive news regarding the Eurozone in the near future. Analyst at Morgan Stanley, a global financial services firm, said they believe that the high-beta rebound may extend in the days ahead, given the stretched levels of bearish sentiment and the potential for positive news on the Eurozone. Still, they also said that they will look to sell into these risk rallies in the case that the policy response from Europe turns out to be temporary.

!m[](/uploads/story/141/thumbs/pic1_inline.png)As always with the Europe’s sovereign-debt crisis, concerns about the Euro are never limited to the single currency only. The Japanese Yen (JPY) and the U.S. dollar (USD) fell against other currencies as markets remained cautious on the impact of Spain’s agreement last weekend to take a European bailout for its banks, tapping into a $125 billion bailout fund. And when it comes to the Yen, the Japanese currency was also affected by a recently released report from the International Monetary Fund (IMF) which observed that the Yen is “moderately overvalued from a medium-term perspective.” The IMF report also suggested that the Bank of Japan should take adequate action to weaken the Japanese currency.

The Financial Times further reported that the Euro rose 0.6 per cent to Y99.55 while the U.S. dollar rose 0.2 per cent to Y79.53 and the British pound (GBP) rose 0.5 per cent to Y123.52. Despite the figures showing that in April British manufacturing and industrial production were weaker than expected, the Sterling rose against the U.S. dollar, gaining 0.3 per cent to $1.5520. Explaining this recent bounce, the international financial conglomerate, Citigroup, reported that the traders had been short on pound positions going onto the release of these figures.

The Australian dollar (AUD) also rose against the U.S. dollar, gaining 0.6 per cent. Yet the Australian currency remained below parity at $0.9918 after touching more than $1 the previous day. After the Reserve Bank of Australia lowered borrowing costs less than swap rates had indicated, the Australian dollar climbed versus all of its 16 major counterparts. According to data released by the US Commodity Futures Trading Commission (CFTC), speculators held record shorts on the Australian dollar following the further interest rate cut by a 25 basis points which the Reserve Bank of Australia announced last week.

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