Sterling hits high as investors move away from dollar

Published: 01 June, 2011

Sterling hit the highest level against the US dollar in nearly a month yesterday after a jump in global risk appetite saw investors move away from US dollars into other higher yielding currencies.

Currency rates - June 1

EURO/GBP - 1.1425
US$/GBP - 1.6477
CHF/GBP - 1.3981
CAN$/GBP - 1.5934
AUS$/GBP - 1.5340
ZAR/GBP - 11.175
JPY/GBP - 134.14
HKD/GBP - 12.817
NZD/GBP - 1.9981
SEK/GBP - 10.148
US$/EURO - 1.4427

Despite a quiet day for data, progress on the euro zone debt crisis saw a surge in demand for the euro. Sterling fell as much as 0.9% against the single currency after news was released that Germany would make concessions on efforts to help Greece avoid a debt restructuring. Germany has been generally more and more resistant to propping up other countries in the region, so this is a key change. Despite sterling's jump against the US dollar, there is a lot of risk to the pound this week with a wide array of key data that could weaken sterling if it comes in worse than expected.

In the euro zone, the euro had a bumper day, boosted by the German concessions but also off the back of comments from head of euro-area finance ministers Jean-Claude Juncker who ruled out a "total restructuring" of Greek debt on Monday. Whilst more aid to Greece does not solve the problem, it minimises the 'contagion' risk of spread to Ireland, Portugal and others as it keeps borrowing costs lower in the region.

In the USA, the surge in risk appetite following the news on Greece saw equity markets jump around the world. The US dollar is closely correlated to risk appetite, so when investors feel happier taking risk, they quickly move funds away from the low yielding US dollar denominated assets. US data has been lagging of late, and as such, the prospects for higher interest rates are low.

Elsewhere, the Royal Bank of Canada voted to leave interest rates unchanged at 1% for the 6th month in a row. Citing slower growth in the USA and poor data in Canada, the Governor stated that this provided enough justification to pause their programme of rate hikes that started in the wake of the 2008 financial crisis.

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