Euro and sterling update 2010

The euro has been doing well despite some dodgy Euroland statistics. Granted, Germany’s economy grew by +2.2% in the second quarter, way ahead of anything else in the region (Britain +1.2%) but the euro zone as a whole only managed +1.0%; not the stuff of legend.

Consequently, sterling has suffered against the euro – to the tune of five cents – even as it rose by three against the dollar. There are several worries; renewed quantitative easing that could undermine confidence in the currency, falling house prices and high government borrowing. The biggest concern, however, is that government spending cuts will tip the economy back into recession.

Fortunately for the pound, the International Monetary Fund (IMF) disagrees. Its recent report says the recovery is “under way”. It believes government policy is “appropriately ambitious” and that “fiscal tightening will dampen short-term growth but not stop it as other sectors of the economy emerge as drivers of recovery.”

Currency sentiment has been particularly fickle this year. Investors’ love/hate relationship with the euro and the dollar flips on an almost monthly basis and sterling either dodges or suffers the collateral damage. That situation is not about to change but, trades unions permitting, the UK economy seems to be no more under threat than its G7 peer group.