Euro Hits Five Month Lows Against Sterling And The US Dollar

By: Mike Campbell
The Euro has been trading at its lowest levels against both the US and UK currencies in five months. Analysts are concerned about possible knock-on effects that the dire straits of the Greek economy may have on the rest of the Eurogroup block (see Wednesday’s article). However, I my opinion, this would be a case of the tail wagging the dog when you consider the relative importance of the Greek economy to either the Eurozone or the European Union as a whole. Some analysts have suggested that the relative strength of Sterling is to do with inflationary pressures which are emerging in the UK economy. The inflationary level in the UK was recently determined to be 2.9%. The argument of these analysts goes that the Bank of England may need to act sooner than later against inflationary pressure by raising the interest rate – this would boost the value of Sterling were it to happen. Again, this argument is not very convincing since the Bank of England has maintained its low interest rate policy since March 2009. The logic behind the bank’s position was that “cheap” money would stimulate economic recovery by providing inexpensive funding to business and encouraging consumer spending since the return on savings would be less than the inflation rate. Given that many analysts have predicted that the current recession may be a “double dip” affair and that there is near universal agreement that the recovery (and particularly the UK recovery) are fragile at best, the bank is unlikely to jeopardise recovery by tinkering with the interest rates until the recovery is well established.
The Eurogroup may not be too displeased with the easing of the value of the Euro since it makes exports from the zone cheaper. Given the fragility of the recovery, this can only be a good thing for Eurozone economies.