The dollar extended its rally versus the euro and sterling on concern over European banks¡¯ exposure to US subprime problems. The euro fell off the 1.36 handle versus the dollar and reached as low as 1.3537. The sterling slumped against the dollar and broke through 2 for the first time in six weeks.
The sterling weakened sharply as two UK government reports showed an expected decline in inflation, dampening expectations for another rate hike by the year-end. UK consumer prices index fell from 2.4% to an annual rate of 1.9% in July, below the Bank of England¡¯s target rate of 2% for the first time since March 2006 and worse than the estimate of 2.3%. Another inflation gauge, retail price index, fell to 3.8% in July, also below the forecast of 4.3% and a reading of 4.4% in the previous month.
The euro was hit by soft GDP reports from euro zone and Germany. Euro zone economic growth slowed from an annual rate of 3.1% to 2.5% in the second quarter, below the forecast of 2.7%. Germany GDP also fell to 2.5% in the second quarter, down from a 3.3% growth rate in the prior quarter.
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