Tuesday, 25 Jan 2011

EUR Tumbles against U.S. Dollar

The euro came off a two-month high on Tuesday as the euro zone rescue fund's first offer of debt went in line with expectations, while the pound dived after figures showed a shock contraction for the economy last quarter. The euro fell 0.3% to $1.3610

Speculation about potential interest rate increases in the euro zone and Britain took a step back as the poor UK GDP data prompted investors to focus on worries about growth rather than inflation. Sterling tumbled after a surprise 0.5% contraction in fourth quarter UK GDP due to adverse weather, compared with economists' forecasts of a 0.5% gain. The GBP fell around 1.4% against the dollar at around 1.5790.

Tomorrow, Markets await more details from the Federal Reserve, which wraps up its last policy meeting of the year on Wednesday. Investors expect the central bank to keep its benchmark interest rate at a historic low level of near zero for the time being, but there is some concern that rates could rise sooner than previously thought as the economy improves. Higher interest rates or the expectation of higher interest rates in the near future can boost a currency as investors transfer their funds to where they can earn higher returns.