The euro fell to $1.4345 after the vote, from as high as $1.4416, as leveraged accounts took profits on bets that the confidence vote would be passed. Bargain hunters at the lower levels helped pushed the currency higher to $1.4394 in early London trade.
“It was a case of ‘buy the rumour, sell the fact’, and the euro fell pretty sharply once the vote was passed,” says Jonathan Cavenagh, a currency strategist at Westpac Banking Corp in Singapore. “The euro is not out of the woods yet, but there seems to be more chance of a short-term fix.”
If euro concerns abate, focus is likely to shift back to the dollar, with investors looking to the Federal Open Market Committee meeting this week for clues on the future of the US currency.
The FOMC started a two-day meeting on Tuesday, ahead of this month’s ending of the most recent programme of US quantitative easing, known as QE2. Policy-makers are unlikely to announce any further liquidity provision, analysts say, though they may give an indication of continuing reinvestment of the proceeds of maturing bonds purchased as part of the QE process.
Asian currencies rose against the dollar ahead of the FOMC announcement on Wednesday, with the South Korean won leading the way, trading at 1073.90, the highest level since May 23, compared with 1078.73 previously.
Elsewhere, sterling investors will watch for the minutes of the last Bank of England Monetary Policy Committee meeting, after the central bank left its key rate at a record low and maintained its programme of asset purchases at its June meeting.
Britain’s economic recovery remains fragile and more quantitative easing could be needed if deflation becomes a risk, BoE policy-maker Paul Fisher said on Tuesday. The pound traded little changed at €1.1271.