Euro hits new low as US dollar continues to strengthen
10/Σεπ/2014 • Currency Updates•
Traders have continued to fret about the uncertainty surrounding Scottish Independence following the sterling suffering its worst trading day in 13 months yesterday with the British pound hitting a 10 month low. A TNS poll showed today that the Yes vote increased to 38% from 32% a month ago while No declined to 39% from 45%. While there was a lack of substantial GBP reaction overnight, Mark Carney’s speech yesterday referred to market expectations of a sooner than expected rate hike in the Spring due to recovery having exceeded expectations, suggesting that there is more room for downside. Carney did however show a lack of concern about the referendum due to the Bank of England’s contingency plan.
Sterling has fallen 5 cents in September against the dollar, with this sharp decline being compounded by investors piling into the US dollar after a Federal Reserve study has suggested the American central bank could be implementing a sooner than expected rate rise.
European stock markets fell slightly on Tuesday, with the euro hitting its lowest level against the dollar since July 2013 due to the diverging monetary policy stance between the Federal Reserve and the European Central Bank.
The dollar has rallied due to expectations that the Fed will announce sooner than expected rate increases while the euro weakened across the board after the ECB unexpectedly cut rates to record lows across the Eurozone last week and unveiled new easing measures in a bid to boost inflation.
The USD is on course for a 3 year high on the Trade Weighted Index and best quarter since three months through June 2010, gaining against all the major world currencies bar the Chinese renminbi. With expectations of central bank policy easing and fears over Scottish independence contributed to the USD climbing 0.3% against sterling and 0.5% against the euro and yen.
The USD showed a broad strength today with a FOMC member suggesting that the low levels of volatility in financial markets may indicate that investors are underestimating the speed at which the Federal Reserve will raise interest rates, leading to higher UST yields over the session.
The weekend speech by Boston Fed President Rosengren increased the possibility that the Fed will modify its “considerable time” guidance at the coming Federal Open Market Committee (FOMC) meeting. It was suggested that the Fed should move away from providing date-based guidance but focus on what incoming data is suggesting about reaching full employment and 2% inflation. If this modification were to occur then it would accelerate the current trend of higher UST yields, further strengthening the dollar.