Before going headlong into a tumultuous week of stress, spending and of course, seasonal cheer, we can look back on a week that’s been kind to the dollar and just a bit vicious to the euro.

Monday saw the Government of Dubai authorising the use of USD4.1 billion to settle the maturing Sukuk (Islamic financial certificate) that was causing concern in the market. Abu Dhabi stepped up to show that you can always count on your neighbours, and pledged immediate financial support for both Dubai and Dubai World to the tune of USD10 billion. This helped the euro out a bit, and the single currency climbed to USD1.467, allowing sterling to make a slight gain on the dollar as well.

However, the dollar rose back with a vengeance on Tuesday, hitting a two month high against the euro and slapping the pound into submission. Sterling wasn’t helped by outlook for the UK’s fiscal health and looming budget deficit – which will be reluctantly adopted by the next government, whoever that might be. 

By midweek the euro was still struggling and the downgrade of Greece and jitters in Austria only made matters worse. The dollar continued its mighty surge, kicking dust in the face of a downbeat sterling amid signs of economic recovery in the US, too soon?

Sterling did jump a little as UK unemployment data confirmed that the number of people claiming benefits unexpectedly dropped by 6,300 in November.

The dollar had gained even further by Thursday on the back of the Federal Reserve keeping their interest rates on hold. This suggests there may not be a rate hike until late next year, even early 2011. UK retail sales didn’t do much for sterling and the euro was still suffering after S&P joined Fitch Ratings in downgrading Greece which, with the widest budget deficit in the European Union, has a lot to tackle in the near future.

Both the pound and the euro made something of a recovery by the end of the week as the dollar slowed to a more manageable pace. Markets were cautious prior to the release of data showing a further deterioration in UK public finances which begs the question; where will the bad news end?

We’re set to head into a holiday-shortened week with not a great deal to offer apart from Tuesdays GDP data and Wednesday’s minutes to the Bank of England's December policy meeting. On that note, Merry Christmas and a Happy New Year to all on behalf of the Currency Solutions team.