Euro and Sterling Down due to Global Growth Concerns

On Wednesday, both the Euro and Sterling recorded major declines in the face of rising concerns that a hike in interest rates by central banks for controlling inflation carries a big risk of a sharp slowdown in global economic performance.

Inflation Rises in Britain

The consumer price index data for Britain showed that there was a 9.1% increase that took inflation to the highest seen in almost four decades. This resulted in a 1% drop in Sterling, as it reached a one-week low of $1.2162. However, it managed to trim some of the declines, as it climbed up once more. By 1115 GMT, the currency was down by 0.2% to $1.2254.

There was a gain recorded in the US dollar because of its safe-haven status, as investors once more became nervous about the prospects of global growth. As far as the Japanese yen is concerned, it fell to lows of 24 years, as there was a contrast between rising European and US yields with low interest rates in Japan.

There is an increase in fears of recession, as central bankers are slowing demand in order to put a stop to inflation. This has boosted the demand for the dollar and pro-cyclical currencies have stepped back. Market strategists said that higher prices in Britain were squeezing real wages and rising borrowing costs would just worsen the scenario and increase the possibility of a recession.

The other main event on Wednesday is the appearance of Jerome Powell, the chairman of the US Fed, in front of the Senate Banking Committee for a two-day testimony. Investors are tracking the testimony to see what the Fed has on the cards for their meeting in July.

Dollar Yen Performance

There was a 0.05% rise in the dollar index, as it reached 104.5, while the euro reported a 0.1% decline to $1.0524. The yen had last climbed by 0.65% to reach $135.96, after having reached $136.71 in early trading. This was the lowest it had been since October 1998. According to analysts, it is unlikely that the sell-off in the yen would stop any time soon.

The Japanese currency has gone down by 18% since the start of the year, when it had been at 115.08 at the end of last year. The current account of Japan is under pressure due to higher energy prices, which has weakened the currency. Likewise, the ever-widening gap between US Treasuries and Japanese government bonds has also weakened the yen.

Last week, the Bank of Japan did not change its monetary policy stance and vowed to continue defending it by capping the yield on 10-year bonds at 0.25%. As far as commodity currencies are concerned, there was a 1.3% drop recorded in the Norwegian crown against the US dollar, as it came down to 9.9750. Meanwhile, the Australian dollar also recorded a drop of 0.94%, which brought it to $0.6907. This was because of a fall in commodity prices that had weighed down the currency values.

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