The euro weakened sharply Friday, as impending elections in Ireland revived concerns about the euro zone's unresolved debt crisis, which momentarily overwhelmed nervousness about slower U.S. growth and geopolitical instability.
Ireland, one of the 17-nation currency bloc's most troubled economies, has pledged to adhere to an austerity program designed to cut the country's debt load. The conditions are also part of EUR67.5 billion in loans from the European Union and the International Monetary Fund.
This week, the single currency has escaped worries about Europe's sovereign debt crisis, which traders fret may ensnare countries like Portugal and Spain. Meanwhile, market speculation about whether the European Central Bank will raise interest rates soon has broadly supported the euro.
At least for the moment, investors appear less concerned about the political instability that has roiled Libya and sent oil prices on a tear.
Speculation about the intentions of Ireland's incoming government "reminds people that the big white elephant in the room is sovereign risk, and it's interesting that nobody wants to talk about it," said Greg Salvaggio, vice president of capital markets at Tempus Consulting in Washington.
Noting that Ireland "has absolutely no banking system" since the government bailed it out, Salvaggio added that once fears about Libya's political instability abated, "the focus is quickly then going to shift" to how euro zone leaders intend to resolve its simmering debt crisis.
News that fourth quarter U.S. growth data checked in at 2.8%, short of market consensus estimates of 3.3%, briefly knocked the dollar lower. Yet selling pressure eventually resumed on the euro, which has benefited this week from investors pursuing expected higher yields in Europe.
In early trading, the euro changed hands around $1.3750 against the dollar, and bought about Y112.40, down from Thursday's New York closing levels. Meanwhile, the dollar slipped to Y81.78, while the pound was at $1.6081 from $1.6142.
Sterling fell sharply after data showed that the U.K. economy shrank by 0.6% in the last quarter of 2010, compared with an initially estimated quarterly drop of 0.5% in late January. This helped scale back expectations of three rate increases by the Bank of England this year.
In Ireland, the center-right Fianna Fail is expected to suffer the worst defeat in its 85-year-history. Opinion polls point to the establishment of another center-right government led by the Fine Gael party.
With debt auctions coming up in Portugal and Spain, the Irish elections are raising questions among investors about how Europe might absorb higher inflation and potentially higher interest rates as it struggles to contend with its debt crisis.
"Renewed focus on the euro zone's debt problems remains a potential drag of the single currency next week. However, if concerns about inflation and the outlook for interest rates remain at the forefront, the euro is likely to continue to find support against the U.S. dollar," Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, Inc., said in a research note to clients.
Source: http://online.wsj.com
Ireland, one of the 17-nation currency bloc's most troubled economies, has pledged to adhere to an austerity program designed to cut the country's debt load. The conditions are also part of EUR67.5 billion in loans from the European Union and the International Monetary Fund.
This week, the single currency has escaped worries about Europe's sovereign debt crisis, which traders fret may ensnare countries like Portugal and Spain. Meanwhile, market speculation about whether the European Central Bank will raise interest rates soon has broadly supported the euro.
At least for the moment, investors appear less concerned about the political instability that has roiled Libya and sent oil prices on a tear.
Speculation about the intentions of Ireland's incoming government "reminds people that the big white elephant in the room is sovereign risk, and it's interesting that nobody wants to talk about it," said Greg Salvaggio, vice president of capital markets at Tempus Consulting in Washington.
Noting that Ireland "has absolutely no banking system" since the government bailed it out, Salvaggio added that once fears about Libya's political instability abated, "the focus is quickly then going to shift" to how euro zone leaders intend to resolve its simmering debt crisis.
News that fourth quarter U.S. growth data checked in at 2.8%, short of market consensus estimates of 3.3%, briefly knocked the dollar lower. Yet selling pressure eventually resumed on the euro, which has benefited this week from investors pursuing expected higher yields in Europe.
In early trading, the euro changed hands around $1.3750 against the dollar, and bought about Y112.40, down from Thursday's New York closing levels. Meanwhile, the dollar slipped to Y81.78, while the pound was at $1.6081 from $1.6142.
Sterling fell sharply after data showed that the U.K. economy shrank by 0.6% in the last quarter of 2010, compared with an initially estimated quarterly drop of 0.5% in late January. This helped scale back expectations of three rate increases by the Bank of England this year.
In Ireland, the center-right Fianna Fail is expected to suffer the worst defeat in its 85-year-history. Opinion polls point to the establishment of another center-right government led by the Fine Gael party.
With debt auctions coming up in Portugal and Spain, the Irish elections are raising questions among investors about how Europe might absorb higher inflation and potentially higher interest rates as it struggles to contend with its debt crisis.
"Renewed focus on the euro zone's debt problems remains a potential drag of the single currency next week. However, if concerns about inflation and the outlook for interest rates remain at the forefront, the euro is likely to continue to find support against the U.S. dollar," Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, Inc., said in a research note to clients.
Source: http://online.wsj.com
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