Pound hits highs versus euro as IMF stokes Greek debt fears

Tom Tong27/May/2011Currency Updates

GBP

Sterling hit a 2-and-a-half-month high against the euro on Thursday as investors dumped the single currency on growing speculation that Europe may be expected to offer more debt aid to Greece. Demand from Asian investors boosted the pound while Greece’s problems dented confidence in the euro, but sterling gains may be capped as the UK economy faces its own risks, while low interest rates keep returns on UK assets lower than many other currencies. The pound did also reach a 14-day high against the USD as it continues to enjoy a small bounce from GDP data, which showed that the UK economy was still growing despite anaemic consumer spending data.

EUR

Despite hitting a low against sterling, the single currency clawed back some recent losses against the dollar on Thursday as news that China may snap up a significant portion of the Eurozone’s Portugal rescue bonds. The chief executive of the European Financial Stability Facility said China was “clearly interested” in buying bonds for the Portugal bailout to be issued in June, according to the Financial Times. The report alleviated some fears about the region’s sovereign debt crisis. However, traders remain concerned that Greece will eventually need to restructure its debt. There have been increasing calls for Greece to be allowed a “soft restructuring,” and the markets have expressed fears that Ireland and Portugal would soon follow suit.

This speculation was strengthened yesterday as top Eurozone policy maker, Luxembourg Premier Jean-Claude Juncker (or ‘Mr. Euro’ to many), suggested that the IMF may withhold its payment next month on Greece’s EUR110 bailout due to fears that the amount isn’t enough to get Greece through the next 12 months.

USD

The dollar had a mixed day as weak GDP figures raised speculation that the Fed will keep interest rates on hold for the time being. While economists had expected US economic growth in the first quarter to be upwardly revised from the initial reading, the Commerce Department released a report on Thursday showing that the pace of GDP growth in the quarter was unchanged from its earlier estimate. The report showed that GDP increased by 1.8% in the first quarter, unchanged from the advance estimate provided a month ago. Economists had been expecting the pace of GDP growth to be upwardly revised to 2.1%. As a result, GDP growth in the first quarter continues to reflect a notable slowdown from the 3.1% growth that was seen in the fourth quarter.

Elsewhere

Japan’s financial markets have recovered after showing significant volatility following the March earthquake, Bank of Japan Deputy Governor Kiyohiko Nishimura said Thursday. Speaking at a conference, he said that Japanese stock market has recovered its value and the foreign exchange market has regained its stability.

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Written by Tom Tong

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