The Affect of PMI's

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The "breakthrough" trumpeted by EU President Van Rompuy at the end of June has yet to persuade investors that the euro's problems are over. The idea is for the two EU rescue funds to provide direct funding to Spanish (and maybe Italian and Cypriot) banks to keep them in business. If Brussels can flesh out the bare-bones agreement into a viable plan, if national leaders can win domestic parliamentary approval, if they can do it swiftly, if the Karlsruhe constitutional court does not block Germany's participation and if the world's investors have confidence that it will work, then the euro will live to fight another day. Plenty can go wrong though, as has happened with similar schemes during the three years of the Club Med crisis.

Yet again it was developments in Euroland that drove global currency movements. Domestic economic news counted for nothing. Investors spent the first four days of the week transfixed by the approaching summit meeting in Brussels and hoping for the best. On Friday they were relieved to hear that Germany had agreed to hand bailout fund money direct to troubled Spanish banks. Their instant reaction was to buy the euro and commodity currencies, at the same time offloading the safe-haven US dollar.

Yesterday Brussels revealed that euro area unemployment had risen to 11.1%, a record high, and many purchasing managers' index readings from manufacturing sectors across the zone were more negative in May. For Euroland as a whole the manufacturing PMI was unchanged at 45.1. The euro suffered no major damage but it lost ground to the US dollar and the yen.

The euro did less well against the pound, where it is now back to its pre-breakthrough position. Much of the credit for that must go to the UK manufacturing PMI, which surprised investors when it recovered by almost three points to 48.6, beating even Switzerland's 48.1. Below 50 it still points to contraction in the manufacturing sector, but these days investors do not look for the best, they look for the least ugly.

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