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US Dollar Exchange Rate Looks to Benefit from EU Troubles

The Pound is resting at a relatively unsettled 1.561 against the US Dollar, with daily lows of 1.559 and daily highs of 1.563. All eyes have once again been on Europe this week, with French President Nicolas Sarkozy and German Chancellor Angela Merkel discussing plans to tighten fiscal unity in the Eurozone in order to prevent economic downfall in the future. Credit rating agency Standard & Poor also drew attention to the Eurozone by putting 15 out of the 17 countries on credit watch with a view to downgrading them.

Whilst Euro uncertainty favours the safe-haven US Dollar it also feeds into the Pound as a regional risk aversion alternative. The Bank of England are reportedly planning a new sterling liquidity facility to address potential stock market stresses as the risk of contagion from the Eurozone proliferates following S&P’s announcement. If this measure is brought in it could help to offset the huge cash flows across the Atlantic in the event of a Eurozone collapse, however as it stands, the Dollar stands to benefit most from the fragile EU outlook.

UK Industrial Production fell 0.7% in October after a flat September figure, and it dropped by 1.7% annually from this time last year. UK Manufacturing Production also dropped by 0.7% in October after a 0.1% growth figure in September, but retained a positive figure of 0.3% annual growth from 2010.

This negative UK data contrasts a positive US Mortgage Application report by the Mortgage Bankers Association. MBA Mortgage Applications grew by 12.8% in the week ending December 2nd after falling by 11.7% the week before.

Although markets are yet to react, it seems probable that the increased talk of further Quantitative Easing, the risk of slipping into recession, the downward pressure from austerity measures and declining export growth to the weakening Eurozone, compounded together could prove bearish for the cable and see the Dollar make progressive gains against the Pound.

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