Welcome to the Pure FX account of what’s affected the exchange rates overnight.
Draghi’s the man! The US dollar lost two cents against the pound and euro overnight, as European Central Bank president Mario Draghi made comments that suggest he can save the euro, resurrecting foreign exchange risk appetite. What exactly does the Italian have up his sleeve? To be fair, he didn’t say, but speaking in London assured us: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
This could include buying Spanish and Italian bonds, thereby reducing their prohibitive yield. To date, this has been out of bounds for the ECB, insofar as it’s not relevant to the bank’s inflation-fighting mandate. Yet yesterday, Super-Mario seemed to have found a way round that, saying: “To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate.” In other words, if high Spanish bond yields mean it can’t feel the effects of lower interest rates, the ECB can intervene to reduce those yields.
Yesterday, Mr. Draghi comments themselves were enough to lower Spanish bond yields, which plummeted from 7.73% to 6.93%. That’s significantly less pressure on Spain, and indicative of just how much power the central banker has. After all, he hasn’t done anything yet!
But of course, whether Mr. Draghi gets to carry out his euro-saving plan will depend a great deal on German support. If Angela Merkel and the Bundesbank decide he risks spurring inflation, as well as diluting German financial strength, they could veto his efforts. That would put an immediate end to this risk appetite rally, and see the US dollar asserting itself against the pound and euro.
Elsewhere, the dollar could also enjoy a comeback today on the latest US growth figures. The States is forecast to have expanded just 1.4% on an annual basis in Q2, down from 1.9% in Q1 and 3.0% in the last quarter 2011. In other words, if these predictions come true, the US is expanding at less than half the pace it was six months ago. That would be due to a lot of things: the Eurozone debt crisis, uncertainty regarding the Presidential election… But such an outcome would benefit the dollar, as the markets decide this newfound optimism is less warranted, and flock to the buck as a safe haven.
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