Euro Zone Economy Contracting Worse Than Expected
Dismal figures from the Euro Zone have prompted a flight to safe havens benefiting both the US dollar and the Japanese Yen. Figures released show that the Euro Zone economy contracted 2.5% quarter on quarter for a 4.4% year on year contraction the worst on record and have had an adverse effect on the euro to dollar exchange rate. Economists had predicted a 2.0% contraction for the Euro Zone. The German economy, the Euro Zone’s largest, contracted by 3.8% in the first quarter. Experts had predicted a decline of 3.0%. Germany posted the sharpest decline since reunification in 1990.
US Industrial Production Declines
Also affecting currency exchange rates was US data that showed that US industrial production declined 0.5% in April and unchanged consumer prices pointing to static consumer demand. Dallas Fed President Richard Fisher said that actions by the Fed had rescued the economy “from the edge of the abyss.” He also stated that he expects recovery to be slow, “I envision a slow recovery. Not a V-shaped snapback — nor even a U-shaped one — but a very slow slog.”
Recovery Expectations Premature
The recent rally prompted by the ‘green shoots’ theory of economic recovery affected both stock markets and currency exchange rates. Many experts and forex traders had warned that expectations of recovery were premature. Recent figures have indicated a slower rate of economic decline but global recovery remains elusive. The euro to dollar exchange rate which had reached $1.37 recently has now fallen 0.4% to $1.3581. European shares were up 0.0.4% on Friday but US stock futures indicated a lower start on Wall Street.
Dollar Falls vs. Yen
While the dollar to euro rate has risen, the dollar to yen exchange rate has fallen 0.9% to 95.08 after hitting a two month low of 94.78. Safe haven demand has benefited both the dollar and yen as investors pull back from riskier investments. Next week factors that will affect currency exchange rates include US housing data and the German ZEW report.
