RTTNews - Friday, the euro plummeted against its major counterparts as weaker-than-expected first quarter GDP reports from major European economies sparked renewed concerns about the depth of the global economic recession. The euro slumped to a 16-day low against the yen and the franc and a 3-day low against the yen.
The German economy contracted more than expected to show the biggest contraction since records began in 1970, as the worst global recession since the Second World War took its toll on the country's exports and labor market.
Data released by the Federal Statistical office showed that gross domestic product or GDP dropped 3.8% quarter-on-quarter in the first three months of the year after falling a revised 2.2% in the fourth quarter. GDP was forecast to fall 3% in the first quarter. Thus, the economy extended its contraction that begun in the second quarter of 2008.
The uncertainty caused by the Lehman collapse has come down and Q2 GDP should decline by less than in Q1, Commerzbank analyst Jörg Krämer said. Commerzbank expects the second quarter GDP to decline by 0.5%-1% over the first quarter.
Meanwhile, the Eurostat said that the euro area GDP declined 2.5% sequentially in the first quarter of 2009 compared to a 1.6% decline in the fourth quarter. Economists were looking for a 2% fall in the first quarter. Compared with the same quarter of the previous year, GDP contracted a seasonally adjusted 4.6%, much larger than the 1.4% decrease seen in the last quarter of 2008. The decline was more severe than the expected decline of 4.1%.
The Italian and the French economies also shrank more than expected in the first quarter of 2009. News of much worse-than-expected GDP figures out of countries such as the Czech Republic, Slovakia, Romania and Hungary further stoked pessimism that the global economic recession may deepen.
The deepest global recession since World War II is curbing European exports and eroding consumer demand, forcing companies to cut spending and jobs.
While policy makers have expressed optimism that the global recession may be easing, today's reports indicate any recovery is likely to be slow. The world economy will shrink 1.3 percent this year and return to growth only in 2010, the International Monetary Fund forecasts.
The Bank of England Governor Mervyn King said on May 13 that the U.K.'s recovery will be slow and protracted. The central bank estimates a 1.9% contraction in the first quarter of 2009, a larger decline than anticipated at the time of the February Report.
Following weak GDP reports, the euro has slipped 2% against the yen, 1% against the dollar, 0.4% against the pound and 0.25% against the franc.
In early European deals on Friday, the euro slumped to a 16-day low of 128.41 against the yen. This may be compared to a 2-day high of 131.18 hit in early Asian deals today. The next downside target level for the euro-yen pair is seen at 126.4. The pair was worth 130.77 at yesterday's close.
The euro-yen pair tumbled to a 1-1/2 -month low of 124.41 on April 28 as concern over the impact of swine flu reduced stock prices and triggered demand for safer assets.
A rebound in Euro-zone economic sentiment and dovish comments by the European Central Bank policymaker Ewald Nowotny helped a bounce back by the euro.
The Euro zone economic sentiment improved in April, for the first time since May 2007, from a record low, a survey conducted by the European Commission showed on April 29. Economic sentiment rose to 67.2 in April from a revised reading of 64.7 in March. The index also stood above the expected reading of 65.6.
The European Central Bank policymaker Ewald Nowotny said the central bank would take all available measures to stabilize the inflationary expectations in the euro area and keep them anchored in the positive terrain.
However, after hitting a 5-week high of 134.85 against the yen earlier this week, the euro weakened again and it has lost around 5% thus far.
Against the Swiss franc, the euro fell to 1.5028 during early European deals on Friday. This set the lowest point for the euro since April 29. If the European currency slides further, it may test support around the 1.476 level. At yesterday's close, the euro-franc pair was quoted at 1.5066.
Following the Swiss National Bank's first solo intervention in foreign-exchange markets on March 12, the euro jumped as much as 3.2 against the franc and reached a 3-month high of 1.5450 on March 16. But the European currency pared its gains thereafter and extended downtrend in the subsequent weeks. The euro-franc pair has declined 3% since hitting a 3-month high.
The euro, which closed yesterday's trading at 0.8958 against the pound, euro weakened to a 3-day low of 0.8922 in early trading on Friday. On the downside, 0.88 is seen as the next target level for the euro.
During early deals on Friday, the euro edged lower against the U.S. dollar. At 6:20 am ET, the euro-dollar pair touched 1.3539, down from yesterday's close of 1.3640. If the pair drops further, it may likely target the 1.344 level.
The euro-dollar pair that soared to a 7-week high of 1.3723 in Asian deals on Wednesday lost ground after a report showed that Euro zone industrial production declined at the fastest pace since record began in early 1990.
Adding to worries, a report from the U.S. Commerce Department said that the retail sales unexpected declined for the second consecutive month in April. The retail sales fell 0.4 percent in April following a revised 1.3 percent decrease in March. Economists had expected sales to come in unchanged compared to the 1.2 percent decrease originally reported for the previous month.
Thus far, the euro-dollar pair has depreciated more than 1% from a 7-week high.
Investors are now likely to focus on the New York session, in which the U.S. consumer price index for April is scheduled to be released at 8:30 am ET. The consensus estimates call for an unchanged reading for the consumer price index and a 0.1% rise in the core consumer price index that excludes food and energy.
At the same time, the results of the New York Federal Reserve's empire state manufacturing survey is slated to be released. The headline general business conditions index for May is expected to come in at -15.
The Treasury Department is due to release a report on the flows of financial instruments into and out of the U.S. for March at 9 am ET.
At 9:15 am ET, the industrial production report of the Federal Reserve is due to be released. Economists estimate that industrial production declined 0.6% in April, while capacity utilization is expected to come in at 68.9%.
The Reuters/University of Michigan's preliminary report on the consumer sentiment index for May is scheduled to be released at 10 am ET. Consumer confidence is expected to remain almost flat in the month, with economists forecasting a marginal rise in the index to 67 from 65.1 in the previous month.
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