Euro Exchange Rate News

The euro exchange rate reached a two-month high against the US dollar

The euro exchange rate reached a two-month high against the US dollar on Tuesday as hopes rise that Greece is finally reaching a deal on austerity measures that will steer it away from a default. Reports out of Athens suggested that Greek leaders are very close to finalising a deal that will include a raft of additional spending cuts which would then meet the conditions of the so called troika (EU, ECB and IMF) and trigger the release of the €130 billion second bail-out agreed last year. In addition, Greece is still in talks about finalising a debt-swap deal with its private creditors.

Markets are anxious that any breakdown in the talks will result in a disorderly default and disastrous consequences for Greece, Europe and the global economy.

The Guardian’s correspondent in Athens has cited government officials as saying that “there is a deal on the table and in all probability the (political) leaders will accept it”. EU officials have marked 15 February as the deadline for the approval to go through in order to have the time necessary for the legal paperwork to be prepared ahead of a €14.5 billion bond that needs to be repaid by 20 March.

Greek Finance Minister Evangelos Venizelos warned about the negative effects of the debate going on in Athens. “A failure of the negotiations, a failure of the program or a default by the country means even greater sacrifices. Unfortunately, the negotiations are so tough that as soon as one chapter ends another one opens,” he stated.

However, the two major European leaders, Angela Merkel and Nicolas Sarkozy, made it quite clear last night that their patience was wearing thin. The German Chancellor said that “I can’t quite understand why we need a few more days.” The French President agreed with Merkel that there would be no aid without the required reforms.

Eurogroup Chairman Jean-Claude Juncker told German radio today that “the euro would outlast us all” and made it clear that he felt Greece would remain a part of the single currency.

The euro also made gains against the pound as the British Retail Consortium (BRC) reported that in value terms, UK retail sales in January were down 0.3% on a like-for-like basis from the same month of 2011, when sales rose 2.3%, picking up after December 2010’s snow disruption, according to the monthly retail sales monitor. These figures are the second-worst figures for any January, after January 2010, since the survey began in 1995.

For Stephen Robertson, Director General, British Retail Consortium, “As 2012 gets underway, it’s clear people don’t feel any better about the immediate future than they did 12 months ago. Customers parked their worries in December and spent, encouraged by discounts. Now, in the New Year, reality has bitten again as concerns about jobs, wages and household costs reassert themselves.”

The major move in yesterday’s markets involved the Australian dollar which rallied after the Reserve Bank of Australia (RBA) took markets by surprise and kept its key policy rate unchanged at 4.25%. Most analysts had forecast a 0.25% cut and an indication that further cuts were on the horizon. Instead, the RBA decided to pause in its monetary easing cycle, saying: “The acute financial pressures on banks in Europe were alleviated considerably late in 2011 by the actions of policymakers. Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made. With growth expected to be close to trend and inflation close to target, the board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy.”

After the announcement, the Aussie dollar strengthened significantly against its major currency pairs. It is an attractive currency for carry trade operations given the much higher interest rates in Australia compared to the majority of the rest of the world.

Tomorrow, all eyes will be on the announcements from both the Bank of England and European Central Bank as to this month’s interest rate policy and quantitative easing budget. A boost of £50 billion to the UK economy is expected by the BoE.

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