Euro drops as contagion fears continue

Tom Tong30/Nov/2010Currency Updates

GBP

The pound was dragged to a two month low against the dollar but struck a two month high against the beleaguered euro on fears that other Eurozone countries will ask for financial aid. The recent slide against the dollar has been underpinned by safe haven demand for the greenback and was not helped yesterday by the news the Office for Budget Responsibility lifted 2010 UK growth forecasts but trimmed growth expectations for 2011 and 2012. However, amid the turmoil in Europe Osborne’s gamble to go for rapid fiscal tightening earlier in the year seems to have paid off. In other news the British government’s spending review has saved 130,000 public sector workers from redundancy by foisting more of the £81 billion of savings cuts on benefits claimants. However, official data released yesterday showed that the UK housing slump is set to continue with mortgage approvals reaching an eight month low in October. House prices also fell for the fifth month in a row.

USD

The dollar continued to make headway against the euro and sterling as Ireland’s rescue package, in the end, disappointed markets. The dollar was up against the yen and sterling as traders sought safe haven investments. The flight to safety was highlighted by the rise in US gold futures and gold prices in general. For now at least the theme of dollar weakness on the back of QE2 (the printing of money) in the US seems to have run its course but may come back into focus as the global ‘currency wars’ become an issue again once the current sovereign debt issues in Europe play out.

EUR

Despite an early rally the euro skidded to two-month lows on Monday as Europe’s approved bail-out package for Ireland failed to sooth market nerves. Initially the market reacted positively to the Irish agreement but within hours the recent trend of euro selling continued as contagion fears took hold and traders focused on the underlying financial health of Portugal, Belgium, Spain and also Italy. Despite politicians from Portugal and Spain denying that they will need assistance sever doubts remained with the precedent set in Greece and now Ireland still prominent. Financial markets are now anticipating that Portugal and/or Spain will need a bail-out similar to the €85bn Irish bail-out agreed over the weekend. Many traders expect more selling in the euro after Italian and Spanish 10-year bond yields jumped by more than 20 basis points on Monday, highlighting the lack of confidence in the deal to help contain Ireland’s crisis. However, one glimmer of hope was that Eurozone economic sentiment rose to a three year high in November. Despite obvious problems in the periphery economic sentiment rose by 1.5 points in the 16 nation currency block and 1.3% across the whole EU, boosted by a strong German performance.

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Written by Tom Tong

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