Dollar gains as investors seek safe haven from Eurozone worries

Tom Tong01/Dec/2010Currency Updates

GBP

Sterling rose to two-month highs versus an ailing euro on Tuesday as European sovereign risk concerns undermined the single currency, which in turn hampered risk sentiment and supported the dollar against the pound.

The pound did not fair so well against the dollar, slipping to a two month low as safe haven demand increased significantly in the markets stemming from worries within the Eurozone.

Consumer Confidence in November fell sharply as people were the most downbeat about the prospects for their personal finances in almost two years. This data release had little impact on the pound as it overshadowed by Eurozone events, however Wednesday’s PMI manufacturing data will have a far greater impact on the currency.

EUR

The euro fell to 8 and 10-week lows against the pound and dollar respectively on Tuesday after a rescue package for Ireland failed to dampen speculation other bailouts would be needed in the Eurozone.

During Tuesday investors pushed the single currency lower as the spreads on peripheral bonds rose to new highs amid concern weak member states may ultimately be forced to default. The yield spreads of 10-year Spanish, Italian and Belgian bonds over German benchmarks spiked to their highest levels since the birth of the euro in January 1999 and the cost of protecting against as Eurozone sovereign default surged.

Portugal at present is widely considered to be the most at risk of a bailout,although the major worry in the market is a possible bailout for Spain. Most analysts think European authorities can handle bailing out the relative minnows of Greece, Ireland and Portugal, but Spain at around 12 percent of the Eurozone economy would be a different matter altogether.

USD

The dollar rallied against the pound and euro during Tuesday as risk appetite among investors increased the reserve currencies safe haven appeal. Worries of debt contagion in the Eurozone among peripheral nations, leading to widening yields on Italian, Portuguese and Spanish bonds have brought investors flooding back into the relative safety of the greenback.

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Written by Tom Tong

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