Dollar gains as investors seek safe haven amid EU debt worries and Korea hostilities

Tom Tong24/Nov/2010Currency Updates

GBP

A mixed day’s trading on Tuesday witnessed sterling hit a two-month high against the euro, helped by fears that the Eurozone’s debt crisis may spread from Ireland to Portugal and Spain. In contrast the pound dropped to its lowest in nearly four weeks against the dollar as investors shunned risky assets.

North Korea shelling a South Korean island further dented sentiment in a market already worried about debt troubles in the Eurozone, with participants seeking the perceived safety of the likes of the dollar, yen and Swiss franc.

Ireland’s woes continued as political uncertainty renewed fears a bailout package may be delayed. This combined with the threat of contagion was the key factor in sterling’s 1% rally.

EUR

The euro sold off sharply during Tuesday trading culminating in two-month lows against sterling and the US dollar as investors remained wary of debt problems facing Ireland, Portugal and Spain.

Delays to the proposed EU/IMF bailout caused by political uncertainty in Ireland contributed to the euros downfall, with German Chancellor Angela Merkel stating the 16-nation currency is in an “exceptionally serious” situation after Ireland asked for a financial rescue package.

Risk appetite evaporated on Tuesday with many investors viewing the possible contagion threat for peripheral Eurozone nations as a green light to sell off the currency in favour of perceived safe havens, subsequently benefiting sterling and in particular the US dollar.

USD

The dollar rose for a second straight day on Tuesday after a shelling exchange in the Korean peninsula added to the greenback’s safe-haven allure as did growing concern about Europe’s debt crisis.

Tuesday morning brought about a North Korean artillery shell attack on a South Korean island, which exacerbated the risk aversion ruling financial markets and added to pressure on the euro. The key factor for the dollar’s rally remains its safe haven appeal emanating from the Irish debt crisis and the possible threat of contagion.

The dollar was also able to benefit on Tuesday after GDP figures were released showing the economy grew at a 2.5 percent annual pace in the July-September quarter, better than the previous estimate of 2 percent.

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Written by Tom Tong

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