Dollar uncertainty ruffles markets

THE euro has started the week trading just below $1.18 against the dollar and Stg0.71p against sterling with activity limited due to holidays in Japan and the United States.

Markets are uncertain about how the relationship between the euro and the dollar will pan out for the rest of the year and comments by the G7 and by outgoing European Central Bank President Wim Duisenberg yesterday have left markets uncertain about exactly where to jump on key exchange rates.

Some support from better than expected trade data on Friday helped the dollar but with lack of clarity about where the US economy is headed in the short has put the currency under pressure in recent weeks.

Dan Mclaughlin of Bank of Ireland says the euro will fall to between $1.10 and $1.05 as the year draws to a close while at Ulster Bank Financial Market Niall Dunne, sceptical about the depth of the US economic recovery, still thinks $1.18-1.20 may reflect the real euro to dollar exchange rate in the current climate.

AIB Capital Markets says there is much to consider as we try to anticipate the week ahead.

Weekend comments from Mr Duisenberg that the greater flexibility in exchange rates mentioned by the G7 refers not so much to the euro-dollar exchange rate but to exchange rate regimes adopted in many Asian countries may provide some mild support for the dollar against the euro but the impact so far has been limited.

The dollar will be looking to this week's round of US data to show if economic recovery is sustainable. Of particular interest will be tomorrow's retail sales report for September as well as the preliminary Michigan sentiment survey for October.

There is an unusual amount of uncertainty surrounding the retail sales release but poor auto returns in September suggests a dip in headline spending. Underlying demand, however, should remain healthy, AIB said yesterday.

The flood of corporate earnings reports will also be important in setting the dollar's tone. Increasingly analysts are expecting those figures to start indicating real profit growth in the US, which many will welcome as a tangible sign of economic recovery.

Others suggest strong gains in global stock markets has already anticipated the recovery.

Concrete signs of a pick-up in the economy could provide some respite for the dollar, which has come under strong selling against other majors in recent weeks. In the eurozone, the euro will be looking to the German business sentiment report for October for support.

The survey has shown strong gains in recent months. Analysts expect another rise but the increase may be more modest than in previous months, with the recent appreciation in the euro potentially hitting sentiment.

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