euro exchange rate fell off the cliff overnight

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The euro exchange rate rose on Friday (from 1.3925 at the US open to an intraday high of 1.4012), in part on a story that Moody's issued a ratings warning on California because of its $20 billion deficit and "imminent fiscal challenges," referring to the dysfunctional referendum system.

But then the best euro rates fell off the cliff overnight and today in European trading on the prospect of a 12-month ECB auction on Wednesday, according to the FT. It fell from 1.3940 at the Asian open to 1.3826 so far, or a little over 100 points in half a trading day. This is not much in the grand scheme of things but see an hourly chart - the euro rate can easily test last Monday’s euro low at 1.3745. On the daily chart, we could be forming the right side of a head of a big head-and-shoulders pattern (with the first shoulder in March).

The FT says the Wednesday auction has inspired talk that "funds will leak out of the eurozone as foreign banks tap the auction and convert the proceeds into other currencies." In other words, the ECB's colalteral conditions are too lax and the world’s banks wil ltake advantage of them. The euro fell despite a superficially good IFO survey this monring, and normally IFO sets the tone. In reality, the IFO results are not that hot. See below. And it's a little unclear which currencies would benefit from the supposed leakage, since the high-yielding Australian Dollars itself took a fall on local reports that the Reserve Bank of Australia should not be considered done lowering rates - when only last week the Australian Dollar exchange rate was being touted as the wonder-currency again with everything going for it.

The US dollar rate and yen benefitted from rising risk aversion after the World Bank issued a grim outlook and cut the 2009 forecast for most economies. Most of all, stocks closed down last week for the first weekly drop in a month, amid much chattering about a big pullback, perhaps to the March low or beyond.

Reuters says "Stock index futures pointed to a lower open on Monday as investors assessed the
potential strength of an economic recovery ahead of a round of key data this week. Energy shares could come under pressure as oil fell below $69 a barrel as the dollar exchange rate strengthened."

Off on the side is another factor mentioned in the WSJ today, that Germany’s budget deficit is ballooning at a torrid pace while at the same time upcoming elections (Sept 27) mean taxes cannot be raised.

Pounds to US Dollars = 1.6337
Pounds to Euros = 1.1785
Euro to Pounds = 0.8489
Pounds to Australian Dollars = 2.0754

Bye For Now

Barbara Rockefeller
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