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• January 2012

  Euro update

  The euro has generated seemingly endless heat and light in the last month but none of it has been translated into net motion. Against the pound and the US dollar it is essentially unchanged from its position on Christmas Day and New Year's Day. The euro's range against the dollar has covered four and a half cents during that time and two and a half against sterling.

  Investors have proved surprisingly resilient in their support for the euro despite all it has thrown at them. Every time EU finance ministers gather, and following every summit meeting, the euro receives another burst of support. Apparently investors are desperate to believe that this meeting - the fifteenth, the umpteenth, it doesn't matter - will be the one that delivers the goods. They see not the least irony in the hope that each new agreement will succeed where its predecessors failed. At the moment the market is pinning its optimism for the euro on three developments: the European Central Bank's provision of unlimited, cheap three-year loans to the region's banks, the downturn in Italy's borrowing costs that this helped to provoke and the ongoing negotiations between the banks, the Athens government, the EU and the International Monetary Fund to reschedule Greek government debt.

  As long as those carrots dangle before them, investors seem content not to rock the boat. After all, there really might be a rabbit in the Brussels hat and it would be a shame to walk away only to miss its triumphant presentation. Even those who don't believe in rabbits are reluctant to leave the show; as with Father Christmas, you can never be sure

  So the euro totters along, always treading gingerly on the edge but never falling off. Having managed to keep up the act for this long there is no reason to bet it will tumble tomorrow.

• November 2011

  At the end of October investors were cock-a-hoop that EU leaders had agreed a rescue package that would provide Greece with a second lump of finance, recapitalise the region's banks and beef up the financial stability facility to a trillion euros. The euro climbed two cents higher against the pound and rose by three cents against the US dollar.

  Less than a week later the wheels had come off after the Greek prime minister decided he could not sign up for the deal without a referendum. In the confusion that followed, the referendum idea was scrapped the premier stood down. Italy's PM left office only days later and both have been replaced by unelected "technocratic" economics professors. In mid-November there was a third change of government in Euroland when Spanish voters used a general election to sack the ruling party in favour of the opposition, hoping a change of austerity would be as good as a rest from it.

  The euro ends the penultimate week of November three cents lower than a month ago against the dollar and a cent down on the pound. It could have been worse, given the low ebb of confidence in the single currency. However, investors are uncertain about the implications of a euro breakup because they have no idea whether, when or how it might happen. Would it make things worse than they already are? Or would the removal of weaker members - perhaps leaving a hard German-centric core - improve the situation?

  Having taken two years to paint themselves into their current uncomfortable corner it is unlikely that EU leaders will rush to bring things to a head. There is no guarantee that we will be discussing this self-same uncertainty and lack of confidence in a month's time but experience points that way

• October 2011

  You would've had to have beenmarooned on a desert island, cut off from the outside world, not to have noticed that Euroland has had a debt crisis on its hands. It is difficult to comprehend how the crisis has managed to drag on for two long years, pretty much since the EU discovered that Greece had borrowed beyond its means. But it has. The solution from Brussels was to lend even more money to Athens and to hope the problem would go away. But it hasn't.

  At the time of writing EU leaders are hammering out a grand unified plan that will oversee an orderly partial default by Greece. At the same time they will reveal the scope and structure of a beefed-up European Financial Stability Facility that will prevent other Eurozone governments – notably Italy and Spain – finding themselves unable to fund their debts. A broad reinforcement of banks' capital resources will also be part of the deal.

  Let's consider what the plan could mean.

  First, and essentially, it will mean losses for the holders of Greek government bonds. There is no point in lending more money to Greece when it cannot even cope with its existing borrowings. It will mean more government money for European banks and more disgruntled voters, especially in Germany. It will mean higher borrowing costs for Euroland governments in general, especially for France, which could well lose its AAA credit rating as a result of increased commitments to the EFSF pot.

  As for the Euro itself, it is likely that the debt resolution will achieve little or nothing. There will still be nervousness about Italy and Spain and the Euroland economy will be held back by the diversion of cash to the various bailouts. Intriguingly, after all the fuss, the Euro, the Pound and the US Dollar are in identical positions today to those they occupied a year ago. There has been movement along the way but no net change. It is not impossible to imagine that the new EU plan will perpetuate that stability.

• September 2011

  In the last two months, sterling has predominately been stuck in a horizontal trend between €1.1250 and €1.550. However as the early days of September ticked by, the rate moved above €1.16 for the first time since early March, resulting in a 6 month high. The rate even briefly peaked above €1.17 on the 12 of September before falling sharply only a few days later.

  So, once again we sit in the range above €1.12 and below €1.16 and Greece is back in the spot light. Merkel and Sarkozy did well to calm investors' nerves with comments stating they are convinced Greece will remain within the euro mechanism, but this confidence did not last long. A Greek default now looks inevitable as the mid October deadline for much needed funding draws ever closer and the chances of Greece meeting the conditions set out to receive the next instalment of the bailout package moves further away.

  Greece said it was close to a deal with the Troika*, but that confidence seems very one-sided as the IMF, ECB and EC were so frustrated with Greek failures that they didn't even attend the meeting – instead opting for a conference call. The IMF has raised fears further by announcing that the global economy has entered, "a dangerous new phase" of slow growth in relation to the euro zone debt crisis.

  With the ECB lowering growth and inflation forecasts, this suggests that the euro zone is suffering an economic slowdown and speculation is increasing that that the ECB will be forced to cut interest rates in the area during the final quarter of the year. This represents a quick turnaround following two interest rate rises since June and will do nothing to alleviate concerns that a single monetary policy across such a diverse range of economies doesn't work.

  The problems in the euro zone continued when S&P fired a shot across the bow of Italy, downgrading the country one notch to A/A1 and blaming political infighting for an ineffective reaction to its financial problems. The bad news for Europe and its banks continued, with a report that Siemens recently withdrew more than €0.5 billion of cash deposits from an as-yet-unknown French bank, and transferred the funds to the ECB due to fears about the health of the bank.

  As expected the Bank of England's Quarterly Bulletin suggested that the UK's QE policy was a considerable success, adding 1.5-2.0% to GDP (and up to 1.5% to CPI inflation). Whether correct or not, the market has interpreted this as part of a communiqué that more QE is on its way, which could be viewed as either GBP-negative or reassuring that the bank stands ready for action, depending on your side of the fence.

  The direction of the sterling/euro will largely depend on how euro zone leaders and the International Monetary Fund deal with the debt crisis and whether the markets view it with optimism or scepticism.

  *The Troika refers to the group consisting of the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) that coordinated the financial bailouts of Greece, Ireland and Portugal.

• August 2011

  During the compilation of last month's edition of this column the euro traded at €1.1335 to the pound and at $1.4450. It has visited those exact same levels today. To take the comparisons a stage further, euro/dollar has crossed the $1.4450 line more than a dozen times since April and sterling/euro has passed through €1.1335, at a rough count, 16 times since March. As with a football match that goes to penalties after extra time, with the teams drawing 6-6, that does not mean nothing has been going on.

  The southern European sovereign debt crisis continues to fester, although with three quarters of the continent's politicians and bankers on holiday it has been festering more slowly in August. The European Central Bank has been holding things together, buying Spanish and Italian government bonds to prop up the market, but that is no more than a short term tactic. Without a proper solution things will get nasty.

  In Washington the bloody-mindedness of party politicians has cost America its triple-A credit rating, at least as far as Standard & Poor's is concerned. Having refused to agree on an increase to the debt ceiling they could well have condemned the country to spending cuts which will have an arbitrary impact on the rich and poor alike. Well, the poor, anyway.

  Relatively, Britain is the saint in all of this. It has no credit or budget crisis. There is (albeit unenthusiastic) government harmony on the fiscal position. Economic growth in Q2 was at least equal to Germany and the euro zone. Together with an undisputed AAA credit rating it makes sterling a candidate for the world's top safe-haven currency at a time when one is needed the most.

  But life is not that simple. Sterling's long record of boom-and-bust makes investors wary. So they don't like the euro, they don't like the dollar and they don't trust the pound. It is not impossible to imagine having this very same conversation in a month's time.

• July 2011

  The seemingly endless saga of Greece, Ireland, Portugal, debt and contagion is almost certain to run into a third year. Having initially assured investors that Greece was perfectly capable of supporting a huge and growing deficit, the EU admitted defeat last spring. The wealthy Euroland nations clubbed together to lend Greece even more money. This bailout, the EU insisted, would solve the problem once and for all. It gave the same assurance when it later had to rescue Ireland and Portugal on similar terms. Now, Greece needs to borrow yet more money and Portugal is waiting in the wings for a second handout. This July Eurozone leaders agreed on a new plan that will cover those three, together with any other country which might find difficulty in selling its government bonds to unwary investors (Italy? Spain?). This plan will solve the problem once and for all.

  Not surprisingly, investors are sceptical. They have heard it all before. They are also now worried about a totally self-inflicted debt problem with which Washington has saddled itself. The Republican House of Representatives wants to cut public spending. The Democratic Senate and White House want to raise taxes. Withoutan agreement, there will be no sign-off for an increase in the "debt ceiling", which limits the total amount the government can borrow. Without an increase the government will run out of money. Almost whatever the outcome of the negotiations, global investors' trust in America and the dollar will have been damaged.

  Britain's economy grew by just 0.2% in the nine months to June. Technically, it amounts to a recovery. Practically, the growth is so minimal that only a statistician would notice it. Interest rates will remain low for an indefinite period.

  Three basket cases; three currencies that nobody really wants to buy. It is less a matter of picking a winner than of avoiding the biggest loser. Faites vos jeux!

• June 2011

  Most politicians and all national leaders in Euroland are adamant that the problem of Greece's overdraft will soon be sorted. At the same time it is easy to find sceptics among Anglo-Saxon ex-politicians on both sides of the Atlantic: They see no sense in postponing what they see as the inevitable default and argue that lending yet more money to a spendthrift is like plying an alcoholic with booze.

  Investors are doing their best to keep an open mind. On one hand they would much rather see the EU rescue attempt work than have to live with the consequences if it didn't. On the other, they cannot help but fear what will happen when the EU handouts eventually stop. The uncertainty leads to frequent changes of sentiment towards the euro; the French president says it will all be alright and the euro goes up; an American investment bank says it will all end in tears and the euro goes down.

  Sterling/euro has covered a range of six cents in the last six weeks with major changes of direction roughly once a week. Not all of those reversals have been down to the euro though. Sterling is still quite capable of shooting itself in the foot, as it did when the Bank of England's monetary policy committee started talking again about increasing the asset purchase programme - quantitative easing or printing money if you would prefer.

  At least the Federal Reserve has put a nail in the coffin of its asset purchase scheme. It will end in June and is unlikely to be repeated in the foreseeable future. It will mean one less downward pressure on the dollar; it will not necessarily reduce the volatility of euro/dollar, which has covered a nine-cent range in the last six weeks with half a dozen reversals.

  Interest rates in Britain and the States are likely to remain very low beyond the end of the year. Euro interest rates are likely to go up. That distinction will tend to work in the euro's favour but the advantage will be compromised by every new scare story about Greece.

• May 2011

  The elephant in the euro's living room is trumpeting loudly and will not be ignored. Whilst it would be exaggerating to say that a sovereign default by Greece is now only a matter of time, it would not be a gross overstatement. Athens is selling off state assets and applying further spending cuts to demonstrate compliance with the strictures attached to EU and IMF loans. Ports, airports, utilities, the national lottery, even some islands are on the block as the country struggles to turn capital assets into cash to pay the phone bill.

  The Greek debt fiasco is the main reason why the euro has been receiving a bit of a beating. The secondary reason is that the European Central Bank may be taking a step back from the interest rate increases upon which investors had been pinning their hopes. After its May policy meeting the ECB signalled there would be no second upward move at least until July. The net result for the euro has been the loss of eight US cents and more than three sterling pennies in less than three weeks.

  The main beneficiary of investors' misgivings about the euro has been the US dollar, not because investors are particularly enamoured of it but because it is the easiest and most liquid currency against which to sell the euro. In the background is a slight change of tone at the Federal Reserve. The Fed has revealed it is at last considering a strategy to "normalize" US interest rates; i.e. to take them higher. A move before the end of the year is possible, if not yet likely.

  Sterling has taken advantage of the euro's discomfiture by keeping a low profile and doing nothing particularly wrong. UK interest rates are not going up any time soon but nor, apparently, are anyone else's. Although investors see no compelling reason to buy the pound, neither can they find any fresh reason to sell it.

• April 2011

  Euro interest rates are going up, while sterling and dollar interest rates are not. That distinction has set the tone for these three currencies over the last month.

  Having promised in early March that it would act against an above-target rate of inflation – 2.7% at the last count compared to a target of 2% – the European Central Bank set the ball rolling in April by lifting its refinancing fate from 1% to 1.25%. Investors are in no doubt that further increases are in the pipeline.

  Meanwhile, in London the Bank of England seems even less inclined to tighten monetary policy. At the beginning of the year investors pencilled in May 5 as the likely date for the bank rate to move North from the 0.5% position it has occupied since March 2009. That date has now been erased and replaced by November 10. Maybe. There are two reasons for the big change in sentiment. Firstly, UK inflation fell back in March from 4.4% to 4.0%. Secondly, the nine members of the monetary policy committee have fallen into a consistent pattern of voting six-three against a rate increase.

  Across the Pond there is no suggestion whatsoever that higher US interest rates might be on the horizon. As in London, a vocal minority of the Federal Open Market Committee believes that perennially ultra-low rates simply store up trouble for the future, but the majority of voting members are fearful that to raise rates too quickly would prejudice America's economic recovery.

  The net result has been a race to the bottom between the pound and the dollar as the euro strode ahead. The dollar is winning the contest, thanks to Standard & Poor's. The firm has attached a "negative" outlook to the United States' AAA credit rating. An unexpected improvement in UK retail sales provided the pound with a surprise bounce just before Easter but nobody is under any illusions that it signified a turnaround in sterling's fortunes.

• March 2011

  It was less of a downward drift for Sterling in March than an upward drift for the Euro but either could have been justified by the same logic: interest rates, as usual. More precisely, it was investors' perception of which would go up first, the Bank of England's Bank Rate (currently 0.5%) or the European Central Bank's Refinancing Rate (1.0%). After a period during which the greatest hope was fixed on Sterling, anticipation has now swung firmly towards the Euro.

  Three members of the Bank of England's policy committee want to increase interest rates as a response to inflation, which has now hit 4.4%, well over twice the Bank's 2% target. But the six other members, including the governor, still believe it would be pointless. They say inflation will return naturally when the VAT increase drops out of the equation next January and oil prices fail to repeat the one-third rise they experienced over the last 12 months. From what he said in his Budget speech the Chancellor appears to be sympathetic to that argument, so there is not even any political pressure for a rate increase.

  In Europe, on the other hand, the European Central Bank looks determined to respond to the inflation threat, even though at 2.2% it is only half as threatening as in Britain. The ECB president has as good as promised that Euro interest rates will go up in April – and when he says something like that the market is bound to sit up and take notice.

  Euroland clearly has economic problems of its own, the biggest being what to do about Portugal now the parliament there has thrown out a bill to balance the budget and manage the country's debt. It has become inevitable that Portugal will follow Greece and Ireland into EU-administered receivership and Spain might not be far behind. But for now it is interest rates upon which investors focus and the Euro is out there in the lead.

• February 2011

  It was another zero-sum game for sterling in February. A three-cent rally in the first half of the month gave way to a three-cent retreat that left the pound unchanged in late February from its position at the beginning of the month. Almost the whole exercise was driven by interest rates. Not actual changes in interest rates but in the market's expectations of where they might go. The revolutions in North Africa and the Middle East made an unwelcome contribution to the proceedings.

  Initially everything revolved around the prospect of a sterling interest rate increase. Investors fancied that the Bank of England could not stand idly by with UK inflation running at double its 2% target level. The Monetary Policy Committee must surely act to increase the Bank Rate? Mustn't it?

  From sterling's point of view the game changed dramatically in late January with the publication of figures for UK gross domestic product (GDP). After growth of 0.3%, 1.1% and 0.7% in the first three quarters of 2010 the expectation was that the economy would have expanded by 0.4% in the fourth quarter. Investors were therefore shocked when instead of achieving modest growth the UK economy turned out to have shrunk by -0.5%. Sterling took a tumble from which it could take months to recover.

  That argument kept sterling aloft until the European Central Bank made its presence felt. Three of its top people, on successive days, made the unnecessary comment that the ECB would increase euro interest rates if inflation were to become a problem. On the face of it the statements had no news value: everyone knows that is what the ECB does. So they must have been hinting at something. The ECB is worried that soaring oil prices will push Euroland inflation (2.4% at the last take) beyond the comfort point. Such a development would be anathema to the ECB so it is going to raise interest rates sooner than previously expected. That, anyway, was how investors saw the situation.

  So sterling went up and then it went down. There could be more of that in coming weeks as Portugal follows Greece and Ireland down the road to receivership or the Bank of England surprises everyone with a March rate increase. Rely on uncertainty and hedge half of your euro exposure at a fixed price.

• January 2011

  After a torrid time at the turn of the year the euro began to regain its equilibrium after twelfth night. The market's change of heart was the result of an improvement in the outlook for Portugal, Spain and the other fiscally ailing peripheral states. Until January, investors had been unable to see beyond the risk of default posed by these countries. Nobody wanted to buy their government bonds. Well, not at any rate of interest that Portugal would be able to afford in the long run anyway. China was first to offer assistance, pledging to spend a portion of its huge pot of money on Portuguese and other government bonds. Later, Japan announced it would purchase a substantial part of a multi-government bond issue that Brussels would use to fund its bailout of Ireland.

  The effect of the Chinese and Japanese intervention was twofold. First, it helped restore faith in the unpopular government bonds and made the need for future bailouts less urgent. Second, it implied a diversion of investment towards euro and away from America. It leaves Portugal still paying a hefty interest rate premium for its borrowings but the Lisbon government is paying less than the 7% that it described previously as intolerable. The net effect for the euro/dollar has been a protracted rally that has lifted it eight cents - more than six per cent - above its new year lows.

  From sterling's point of view the game changed dramatically in late January with the publication of figures for UK gross domestic product (GDP). After growth of 0.3%, 1.1% and 0.7% in the first three quarters of 2010 the expectation was that the economy would have expanded by 0.4% in the fourth quarter. Investors were therefore shocked when instead of achieving modest growth the UK economy turned out to have shrunk by -0.5%. Sterling took a tumble from which it could take months to recover.

  The performance of the euro from here on in will depend on how effective the Chinese and Japanese buying is at persuading other investors to join them in buying potentially troubled euro zone government debt. For the dollar, the only real prospect of strengthening against the euro is if the Euroland government debt market suffers a relapse. That is not impossible to imagine but it is impossible to predict. As for the once-proud pound, it will have to endure weeks or months of introspection about the renewed risk of a second recessionary dip. Life will not be easy for sterling.

  Those with regular euro payments to make should consider fixing an exchange rate for at least half their needs in the coming year with a monthly payment plan. The euro is not guaranteed to strengthen further against the pound and the dollar but it would be rash to bank on it weakening.

• November 2010

  For what seemed like half a year investors hated the US dollar. They hated the slowdown in US growth, they hated the advent of a second round of quantitative easing ("printing money" as the naysayers describe it) and they had little interest in the benefits of a safe-haven currency as long as China, Germany, Brazil, Australia and the rest of them were reporting economic progress. Once the problems of Greece's fiscal deficit had been sorted out by a fusillade of EU and International Monetary Fund cash, back in May, they loved the euro.

  That picture has now been reversed. It is impractical for investors to hate the world's two biggest currencies at the same time; where else would they put their money? So they have fallen back in love with the dollar because they don't like the euro. They don't like the way the peripheral states are falling like ninepins to the curse of fiscal improbity. Greece has had to be rescued from bankruptcy and Ireland is following the same path. Lined up in Ireland's wake are Portugal (almost certainly) and Spain, which would be a much bigger headache for the EU stability fund. The worst case would be if Belgium and Italy were to end up in the same boat.

  Compared to its cross-Channel (and Irish Sea) neighbours, Britain is doing relatively well. Four successive quarters of growth have added 2.8% to the size of the UK economy and the number of job-seekers actually fell in October, contrary to predictions. It is unlikely that progress will continue at that level but the prospect of a second recessionary dip now looks faint. Unless and until Euroland can get its budgetary act together it is likely that the dollar will lead the way, followed by the pound and trailed in a distant third place by the euro. Of course, miracles can happen....

• October 2010

  The Euro has made the most of its good fortune. Over the course of six weeks it added 10% against the US dollar and 9% against the pound. Its success against the dollar was mainly due to investors dislike of the USD. A knock-on effect of all the activity in EUR/USD trading, has been that Sterling has been left behind.

  Nervousness has dogged Sterling throughout October and there could be more problems on the horizon. Firstly, the Government's "austerity" policy may well tip Britain's economy back into recession, and secondly, the Bank of England could well decide to run another round of quantitative easing that would dilute the currency's value. Either one would disadvantage the pound, while the two together would be a real problem.

  However, there was a little cause for optimism, with the release of Britain's figures for economic growth in the third quarter. Maybe, things aren't as bad as everyone thought. The numbers are far more positive than even the staunchest optimists had expected. Growth of 1.2% in the second quarter and 0.8% in Q3, have set Britain up for a financial year well ahead of the government's estimates.

  Sterling is not off the hook though. There will be two revisions to the third quarter growth figures and both could be detrimental to Sterling. Half a million public sector redundancies might destroy consumer confidence and plunge the economy back into recession. On the other hand, the UK economy has performed appreciably better in the last nine months than most analysts predicted.

  The Euro has lived a charmed life during the last two months. At some point its luck could well run out.

• September 2010

  The euro has been doing well despite some dodgy Euroland statistics. Granted, Germany's economy grew by +2.2% in the second quarter, way ahead of anything else in the region (Britain +1.2%) but the euro zone as a whole only managed +1.0%; not the stuff of legend.

  Consequently, sterling has suffered against the euro - to the tune of five cents - even as it rose by three against the dollar. There are several worries; renewed quantitative easing that could undermine confidence in the currency, falling house prices and high government borrowing. The biggest concern, however, is that government spending cuts will tip the economy back into recession.

  Fortunately for the pound, the International Monetary Fund (IMF) disagrees. Its recent report says the recovery is "under way". It believes government policy is "appropriately ambitious" and that "fiscal tightening will dampen short-term growth but not stop it as other sectors of the economy emerge as drivers of recovery."

  Currency sentiment has been particularly fickle this year. Investors' love/hate relationship with the euro and the dollar flips on an almost monthly basis and sterling either dodges or suffers the collateral damage. That situation is not about to change but, trades unions permitting, the UK economy seems to be no more under threat than its G7 peer group.

• August 2010

  The euro survived the stress-testing of EU banks, 'proving' they could survive all that Mammon might throw at them. Despite complaints that the stresses applied to the banks' balance sheets were no more stressful than a Chinese burn, that issue is officially dead. What the euro cannot dismiss so easily is investors' ongoing fretfulness about Greece, Club Med and the EU's security blanket. Slovakia has refused to pay. Spain wants a time-out on its austerity regimen. Ireland's credit downgrade means it is paying more to borrow money than Greece, whose borrowing it must subsidise through the EU safety net. All is not sweetness and light for the euro.

  Since its announcement two months ago Britain's Austerity Budget has convinced not just the opposition Labour Party but the world at large that government spending cuts will condemn the economy to a decade (a century?) of decline. They are guessing, of course, but that does not make investors any more well-disposed to the pound. It is not just Sun readers who love a disaster; investors are equally as ghoulish.

  August was a messy month for currencies, as it often is. At the best of times investors cannot know what will happen next. As we move into September that uncertainty is at a twelve-month high.