Foreign Exchange: Pound Still At A Low But Euro Rises Slightly

The Pound yesterday was trading at close to the lowest level in 13-months against the US Dollar, as investors moved to the security of dollar denominated assets as a hedge against risk.

The UK currency fell to a low of $1.4239, although it largely recovered by the close of trading last night.

Neil Mellor, a currency strategist at Bank of New York Mellon Corp, said that “sterling’s being driven by risk aversion. The euro’s problems are, by association, hitting sterling.” Following the German Chancellor’s decision to ban short-selling on the Euro, the Pound has declined further against the single currency, trading down towards 1.15 this morning.

UK stocks dropped yesterday, led by a selloff in commodity producers and banking shares, after the decision by Angela Merkel, which rattled investor confidence. The benchmark FTSE 200 Index lost 2.8% on the day, erasing Tuesday’s modest advance, as risk aversion continues to be the dominant theme in financial markets.

EUR/USD

The Euro rose from the lowest level in four-years against the Dollar yesterday, as European leaders announced steps to support the single currency, spurring traders who bet it will decline to exit their trades. ECB governing council member Axel Weber said that the Euro-zone must “urgently” tighten its fiscal rules.

The Euro was up against the majority of the 16 most actively traded currencies. Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC, said that “every bit of constructive news has been greeted with derision and when the market gets over deriding the European leaders you get a short squeeze.”

U.S stocks fell again yesterday as Germany’s announcement on certain bearish investments and a jump in mortgage foreclosures to a record triggered the selloff in equities. The S&P 500 fell 0.5%, after sliding 1.4% on Tuesday, supporting traders appetite for lower yielding assets like the Japanese Yen.

In the U.S, consumer prices unexpectedly dropped in April for the first time in more than a year, reinforcing forecasts that the Federal Reserve will keep interest rates close to zero for the rest of 2010. The 0.1% fall on the consumer price index was the first decrease since March 2009 and the Dollar subsequently dropped from a four-year high against the Euro.

Drawn from Market Analysis by Adam Solomon, TorFX

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