Continued Eurozone debt worries send sterling high against euro

Tom Tong29/Jul/2011Currency Updates

GBP

Sterling rose against a broadly weaker euro on Thursday as the single currency slipped on lingering concerns over contagion from Eurozone debt, although weak UK data and declining risk sentiment cast a shadow over the pound against the dollar.

British retail sales fell at their fastest pace in a year in July and stores expect a further deterioration in August, as hard-hit consumers clamp down on spending, a survey by the Confederation of British Industry showed. However, movements in sterling were largely driven by a broad sell-off in the euro after an Italian bond auction, which triggered stop-losses against the dollar en route to a one-week low.

The pound had risen to a six-week high on Wednesday as the dollar weakened on concerns that a deal to raise the US debt ceiling may not be reached before an August 2 deadline, raising the prospect of a credit downgrade or even a debt default. Analysts said that sterling was likely to benefit from any downgrade to US debt by rating agencies as the UK, with a sound fiscal plan in place, is likely to retain its AAA rating although austerity measures to curb Britain’s budget deficit are also crimping growth and consumer spending, meaning sterling is unlikely to fly above the $1.70 level in coming months.

Markets continue to expect the Bank of England to hold interest rates at record lows well into 2012, with some speculation that more asset purchases may be needed to revive flagging growth in the economy.

EUR

The euro sank and German bunds jumped after Moody’s put Spain’s Aa2 government bond ratings on review, citing concerns over growth and saying funding costs would continue to be high in the wake of euro zone leaders deal on Greece last week.

Spain’s rating is still set at a high investment grade, far above those of Greece, Portugal and Ireland — the countries bailed out in the crisis so far. But while Moody’s said any cut for Spain would likely be limited to one notch, it said the Greek package had signalled a clear shift in risk for bondholders across the Eurozone

Spanish bond yields are at their highest level in a decade through investors’ nervousness over Spain’s anaemic growth and high unemployment figures. A Greek-style bailout is not out of the question.

USD

The dollar came under broad pressure on Friday, sinking to a four-month low against the yen while risk currencies faltered after the House of Representatives delayed a vote on a Republican proposal to raise the US government’s debt limit, adding to uncertainty ahead of an August 2 deadline.

The euro relinquished earlier gains against the dollar and was down about 0.5% after Moody’s said it may cut Spain’s credit rating, fuelling fears over the Eurozone’s debt problems and weighing further on the Australian and New Zealand dollars .

Urgent efforts to avoid an unprecedented US debt default hit another snag when conservative rebel Republican lawmakers refused to back a budget deficit plan proposed by their own leaders, who put off a vote scheduled for Thursday night.

Even with a deal to lift the debt limit, a downgrade of the US credit rating appears likely unless a big dent is made in the deficit. A downgrade would raise US borrowing costs, hurting an already weak economy and rattle global investors.

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Written by Tom Tong

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