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FX round-up: Dollar dominates

Date: Friday 19 Mar 2010

Heightened concerns over the deal being thrashed out to rescue Greece sent the dollar sharply higher Thursday.

Talk that the Federal Reserve is mulling an increase in the discount rate ahead of expectations also provided the greenback with plenty of support, although the Fed hinted at this week’s policy meeting that the American economy would be unable to handle a hike in borrowing costs right now.

The dollar index, which measures the US currency against a trade-weighted basket of six major rivals, rose the most in a month versus the euro.

Greece was in the spotlight again as traders digested conflicting reports out of the eurozone and worried about the relationship between Germany and the Greek administration.

Reports that Greece will turn to the International Monetary Fund for financial help have done nothing to steady nerves. The Wall Street Journal quotes a senior Greek official as saying that Greece might seek help from the IMF over the 2-4 April Easter weekend if the EU fails to detail rescue plans.

"We still want a solution within the European Union, but it doesn't look good," the official told the paper. "If there is no clear support at the EU summit on March 25, we will have to decide where to go next. There are a number of scenarios on the table, but the most prominent one is the IMF."

A drop in US jobless claims and report on consumer prices had little effect on currency markets.

The pound strengthened to its highest in three weeks against the euro after data revealed Britain’s public finances were in a better state than expected in February, making it highly likely the country’s annual deficit will be far less than forecasts of £178bn.

Public Sector Net Borrowing (PSNB) of £12.36bn was less than the £14.75bn predicted, but still the highest figure for the month since the Office for National Statistics began keeping records, and more than last year’s £8.77bn.

Total borrowing for the current tax year is £131.87bn, well under Chancellor Alistair Darling’s forecasts made in December’s Pre-Budget Report.

“The Chancellor may see this as giving him some "wriggle room" for one or two eye-catching, if limited, pre-election handouts in next week's budget,” said Howard Archer, chief UK economist at IHS Global Insight.

A big downward revision to January’s figure helped. PSNB is now put at just £43m rather than the £4.34bn originally predicted. Revisions so far this tax year have cut the budget deficit by £2bn and net borrowing by £2.9bn.

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