Published: Fri, 13 Feb 2009 14:06:24 +0100

Euro Underperforms as Fourth Quarter GDP Shrinks

(CEP News) - Stronger equity futures are helping to support the euro against the U.S. dollar, but Friday's weaker-than-expected fourth-quarter GDP reports from Europe are hurting the currency on other crosses.

The euro is under pressure against the Canadian dollar and the pound, but up against the U.S. dollar and Japanese yen. EUR/USD hit a high of 1.2943 in overnight trading and is now relatively flat at 1.2862.

EUR/GBP is the big surprise, which gave up all its gains made since Wednesday, after the Bank of England released a very grim quarterly inflation report. EUR/GBP is trading down 0.01757 to 0.88406 GBP.

Hurting the euro this morning is the fact that European countries are weakening more than expected. The German economy declined for the third straight quarter and at its sharpest pace in more than 20 years, the Federal Statistical Office (Destatis) reported on Friday.

In weighted daily average terms, the economy fell 1.7% year-over-year, worse than the 1.4% fall forecast. The third quarter had registered a positive growth rate of 0.8% annually.

European growth also contracted in the fourth quarter. The euro zone economy shrank at a record pace to end off 2008. According to advance estimates from Eurostat, the euro zone economy contracted by a record 1.5% in the fourth quarter of 2008 compared to the previous quarter. Economists had expected a more modest fall of 1.3% following Q3's 0.2% decline.

Currency strategists from Brown Brothers Harriman said the contraction in economic growth could make the euro vulnerable to further weakness. There are growing concerns that the euro zone officials will need to do more to boost the faltering economy, they added.

Currency strategists from CIBC World Markets say strong support and resistance levels are reinforcing the euro's range-bound movements today. They added that they're neutral on the EUR/USD until they see a break below 1.2705.

"We will be willing to sell on a clean break below this price point," they said.

Euro/CAD down 1.69 cents to 1.5830

Euro/USD down 0.27 cents to 1.2835

USD/CAD down 1.04 cents to 1.2334

USD/Yen up 0.73 points to 91.67

GBP/USD up 2.35 cents to 1.4503

AUD/USD up 0.87 cents to 0.6611

Euro/Yen up 0.72 points to 117.67

Euro/GBP down 1.67 pence to 0.8850

GBP/CAD up 1.42 cents to 1.7891

CAD/Yen up 1.21 points to 74.32

The U.S. Dollar Index is down 0.51 points to 86.04

All data taken at 8:02 a.m. EST

By Neils Christensen, neilsc@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca