Euro in retreat against dollar after disappointing business survey

By Pan Pylas, AP
Thursday, September 23, 2010

Euro in retreat after disappointing business data

LONDON — The euro gave up some of its recent gains against the dollar Thursday as traders booked profits after a survey showed business sentiment in the 16-country eurozone dropped sharply in September.

By mid morning London time, the euro was down around 0.4 percent on the day at $1.3331 as investors booked some of the profits accumulated Wednesday, when it went as high as $1.3440, its highest point since April 27.

The monthly purchasing managers index — a closely watched gauge of business activity — added to the selling pressure.

The overall PMI, which combines manufacturing and services, for September fell to 53.8 in September from 56.2 in August. The consensus in the markets was for a far more modest decline to 55.7.

Though the eurozone economy is growing the figures provide evidence that growth has faltered following the surprise spring surge — a reading above 50 indicates growth but the smaller the difference from 50 the lower the growth.

Particularly worrying is that the figures showed that growth in Germany, Europe’s economic powerhouse, has moderated far more rapidly than anticipated — Germany was the main driver behind the 1 percent quarterly growth posted in the eurozone in the second quarter of the year.

Slavena Nazarova, an economist at Credit Agricole, said the figures triggered a drop in the euro below $1.3350 as it “confirmed prospects of weaker and uneven growth in Europe throughout the second half of the year.”

Though the euro is down on the day, it remains well up on the week. On Wednesday, it rose to a near five-month high against the dollar following a hint from the Federal Reserve that it stands ready to provide more assistance to the flagging U.S. economy.

The euro rose as much as 3 U.S. cents after the Fed said Tuesday it is “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with its mandate.”

Following that statement, the markets are now anticipating that the Fed will turn on the taps once again at its next rate-setting meeting in early November, and that the fresh supply of dollars could lead to further weakness in the currency despite the slowdown in economic growth implicit within Thursday’s figures.

Rabobank International said it is looking at revising higher its euro forecasts against the dollar for the coming twelve months in light of the Fed’s indications. However, it said “simmering tensions” in the eurozone regarding sovereign default risk mean that the trajectory “is unlikely to be linear.”

The dollar’s decline Wednesday was not just confined to the euro though. It fell to a low of 84.28 yen, meaning that it has gone a long way to undoing the effects of last week’s unilateral intervention by Japanese authorities in the markets to stem the export-sapping appreciation of the yen.

Even though the dollar advanced modestly to 84.59 yen Thursday, traders remain on the lookout for another intervention from the Japanese monetary authorities — precedent suggests that the Bank of Japan will be back in the markets buying dollars and selling yen.

One currency the dollar has largely held its own against since the Fed statement has been the British pound, and that’s because the Bank of England gave its own hint Wednesday that it was also coming close to sanctioning new monetary measures to boost its economy.

“This in turn undermined the pound which came under pressure along with the dollar as the two currencies jostled for position as the weakest major currency of the last 24 hours,” said Michael Hewson, market analyst at CMC Markets.

By mid morning London time, the pound was flat at $1.5650.

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