Euro's rise against dollar propelled by bad US data

 

The euro briefly breached parity with the dollar yesterday, as an accumulation of negative data raised grave doubts about the health of the US economy.

The move from $0.9887 to $1.0003 came on the back of figures showing that the US unemployment rate had risen to 5.7 per cent in October, with 5,000 jobs being cut.

The rise through the one-for-one ceiling was short-lived however, with the euro closing at $0.9974, a level that suggests insufficient momentum exists for a long-lived euro rally.

AIB chief economist Mr John Beggs said the euro's upward spike, the first parity test since July, was attributable to the sheer volume of weak economic data released in the US over recent days, and its effect on the dollar.

Figures released this week show that the US economy grew by 3.1 per cent over the third quarter, a rate that equates to about 0.7 per cent when annualising factors are eliminated.

On Thursday, a larger-than-expected drop in Midwest manufacturing was reported, while yesterday's Institute for Supply Management (ISM) national manufacturing report also indicated a contraction.

Mr Beggs said it was certain that the currency movement was driven completely by the dollar since the euro zone offered little appeal for investors.

"I don't see the dollar weakening dramatically against the euro because I don't see any compelling reason to buy euros," said Mr Beggs, noting a continuing lack of positive momentum in the euro-zone economy.

Mr Beggs expects the euro to "come off the boil" next week, saying he detected "no great conviction" about yesterday's move.

Mr Niall Dunne, financial markets economist with Ulster Bank, said the market had "convinced itself that the US economy has not come out of the woods".

He noted, however, that the euro had a long way to progress before it could reach the $1.17 level at which it was launched.

Mr Dunne said the currencies were likely to be the subject of speculative trading until the Federal Reserve meets next week to consider a rate cut. If a cut is not delivered, the dollar could give up further ground, he said, noting that the markets have already priced in a Fed easing.

The euro also gained against sterling yesterday, moving up from 63.2p to 63.68p. Mr Beggs said that this was a "side-effect" of the dollar move.