S&P downgrades Greece to world's lowest active credit rating

Tom Tong14/Jun/2011Currency Updates

GBP

Sterling clawed back some of the ground it has recently lost against the dollar and the euro yesterday, finishing up 0.5% against the greenback with similar gains against the euro. The pound made the move against the euro as investors moved out of the currency due to another downgrade by the ratings agency Moody’s and continued delays by politicians seeking to resolve the sovereign crisis. The pound made ground against the dollar as the strong moves the greenback made towards the end of last week began to be unwound. Traders taking profit from the strengthening of the dollar last week executed large sell orders and the currency suffered from weaker than expected data out of China, reinforcing the idea that the global recovery may be stalling.

MPC member Martin Weale spoke yesterday about the need to raise interest rates in the UK in order to bring inflation back to target. His view is that a more immediate rise would give the MPC the required flexibility to deal with ‘evolving circumstances’ in future. His strongly hawkish tone could service to buoy sterling as some analysts had been forecasting a Japanese style interest policy for the next few years. Overnight, the UK Rics survey added a gloomy tone to proceedings by suggesting the UK housing market is going into reverse. The key data release that will attract market attention today is the UK CPI reading for May.

USD

The dollar index, which measures the performance of the currency against a basket of its most traded counterparts, was down yesterday. The dollar remains precariously positioned despite its strong performance last week with the market looking towards the retail sales figures later in the week to see if the slowdown in the US economy has been over-egged. Markets will watch out for Producer Price Index data today, which measures the prices of goods at wholesale level.

EUR

The euro took a hit yesterday as the ratings agency Standard and Poor followed Moody’s lead in downgrading Greece’s credit rating by several notches to the lowest rating in the world – CCC. The already anxious market was further perturbed by S&P’s forecast that the chance of a Greek sovereign default was as high as 50-50. The delay in the resolution of the Greek situation has been due to core differences between Germany and the ECB over whether private sector debt holders should bear some of the cost of a rescue package with a rollover. The Dutch joined the German camp yesterday in calling for private sector burden holding, with the ECB staunchly opposed due to its own exposure to the sovereign debt of Greece. The single currency made clear losses as the news of the downgrade was released with the cost of ensuring Greek debt reaching new highs. However, by the afternoon session and through Asian trading the euro regained some ground against the dollar. None the less, the euro is likely to remain under pressure as key finance minister meeting today look unable to solve key differences and resolve the crisis.

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Written by Tom Tong

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