The Pound, Sterling
Sterling hit a near two-month high against a struggling euro on Wednesday due to uncertainty about how the euro zone will deal with the debt problems facing weaker members. The economy grew 0.8 percent in the third quarter, revised data from the Office for National Statistics showed yesterday, which was twice the initial estimate and unchanged from the preliminary report. The pound traded at 1.1813 after reaching an intra-day high of 1.1863, the strongest since Sept. 21. Analysts at BNP Paribas said that the pound may decline against the dollar, as the U.K. government’s proposed £7 billion assistance loan to Ireland highlights the risks that British banks may lose money on their Irish activities. U.K. financial institutions have the world’s largest quantity of Irish assets, totaling more than $222 billion, according to the Bank for International Settlements. The U.K. currency has weakened 3.7 percent against a basket of currencies this year, making it the third- worst-performing currency after the euro and Norwegian Krone.
Ireland’s government unveiled a €15 billion (£12.7 billion) four-year austerity plan on Wednesday that paves the way for deep spending cuts as well as tax increases to help pay for the bank crisis and meet the terms of an EU/IMF rescue. The plan includes thousands of public sector redundancies, phased-in increases in Ireland’s VAT rate from 2013 and social welfare savings of 2.8 billion euros by 2014, but doesn’t touch the country’s ultra-low corporate tax rate. It retains economic growth assumptions unveiled earlier this month, which many believe are over confident, given the likely effect of the cuts on already fragile domestic demand. The Euro, which has fallen recently on fears of contagion from Ireland to other euro zone countries, barely budged. The Irish Independent newspaper said the situation was so critical that Dublin could pump extra cash into the system as early as this weekend, well before the first European and International Monetary Fund funds come up with their aid. Once a loan agreement is signed it has to be approved by European finance ministers and the IMF board, before the first funds can start to be released. These figures will undoubtedly weigh on the Euro in trade both this week and next.