The Euro weakens against the majors as the German economy contracts

The euro fell against the dollar and versus the yen after a German government report showed Europe’s largest economy contracted last quarter by more than economists estimated. The euro also headed for its first weekly loss in a month versus the dollar on concern a European report today will show the region’s economy shrank. The euro also fell this week as ECB policy makers clashed over the bank’s asset-buying program and the prospects for a recovery. Vice President Lucas Papademos said yesterday a recovery may come sooner than previously thought. Dutch council member Nout Wellink said economists shouldn’t get too optimistic about “green shoots.” The ECB cut its benchmark interest rate to a record 1 percent on May 7 and announced a plan to buy 60 billion euros ($81.8 billion) in covered bonds to loosen credit markets. The EUR/USD is currently trading at $1.3605 as of 8:45am, London Time.

Sterling weakened broadly on Thursday, extending losses incurred the previous day after the Bank of England gave a sober assessment of the UK economy's recovery prospects and on weakness in global stocks. With no major UK or U.S. economic data scheduled for release, sterling traders continued to digest Wednesday's BoE quarterly inflation report and took their cue from broader financial market sentiment, particularly equities. The fall was reinforced by selling against the yen, as the renewed weakness in stocks and banking shares lifted the Japanese currency to an eight-week high against the dollar. The GBP/USD is currently trading at $1.5230 as of 8:50am, London Time.

Global markets are ready for an “aggressive” selloff of higher-risk assets, according to currency strategists at Citigroup Inc. “Almost without exception the various markets seem to be suggesting a real danger that we are about to see a six- to eight-week period that is very risk negative,” Tom Fitzpatrick in New York and London-based Shyam Devani wrote in an e-mailed note yesterday. Also, Industrial production in the U.S. probably declined in April at the slowest pace in six months, signaling manufacturing may be stabilizing, economists said before a report today.

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