UK Pound Strengthens on Kraft & Cadbury Deal

Posted January 19, 2010

The euro is weakening as the European Union deals with Greece’s financial problems including an unacceptable budget deficit and debt in danger of default. The UK pound rose in view of the likely buyout of Cadbury by Kraft. The Canadian dollar strengthened against the US dollar.

 

The currency markets were generally uneventful yesterday because the US markets were closed for a holiday. But the euro did begin to slip against the UK pound and the US dollar for many reasons.

One of the major reasons for a weakening euro, of course, is that budget deficit problems in Greece continue to plaque the European Union. Though Greece has submitted a 3-year budget deficit reducing plan, the EU finance ministers do not believe it is based on realistic data and assumptions. This year the problems in Greece will have to be addressed and some reasonable progress made in order for the euro to maintain its relevance as a reserve currency for the region’s sovereign debt.

The European Union has been trying to reassure markets that Greece will not default on its debt but investors are not entirely convinced.  This is the first real test of the European Union’s ability to force a member nation to accept financial responsibilities.

A second pressure on the euro is the declining German investor confidence index. There has been concern all along that the global economic recovery was being viewed as further along than the facts support. There are signs recovery is stalling in certain sectors. The German confidence index fell to 47.2 this month which makes a fourth month trend downward.

Anything below 50 for the index is seen as negative. In December the index is at 50.0 which makes the third month of decline.

The UK pound rose as the Kraft-Cadbury deal comes close to closing. Cadbury has accepted a $19.7 billion offer from Kraft Foods, and after the deal is closed Kraft will be the world’s largest confectioner. UK consumer prices are rising also and were reported to have risen by 2.9 percent in December 2009 compared to December 2008.

Inflation is a matter that will now have to be addressed as the recovery firms up in the UK. Major contributors to inflation are rising oil prices leading to higher gasoline prices, and higher house prices. Inflation numbers are expected to go up again as the impact of a temporary sales tax reduction drops out of the calculation. This is just one example of the delicate balance that will have to be maintained between exiting stimulus programs and holding onto the pace of economic recovery.

The euro fell to 87.72 pence.  The euro also fell against the yen to 129.99 yen per euro and against the US dollar to US$1.4306.

Investors are currently turning to safer assets as global economic data indicates the recovery may be slowing. The US reports this week on building permit and manufacturing rates in certain regions and the numbers are expected to show declines.

The UK pound remained relatively stable against the US dollar this morning at $1.628 after hitting a 6 week high yesterday of $1.6416.

The Norwegian kroner fell against the US dollar to 5.7807 kroner.

The US dollar rose against the Australian dollar to 91.99 US cents.

The Canadian dollar rose against the US dollar as gold and oil prices rose again. The central bank is meeting today and is expected to hold its benchmark interest rate at its current level of .25 percent. The loonie strengthened to C$1.0265 against the US dollar which means one Canadian dollar buys 97.42 US cents.

 

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