Ratings agencies begin to apply pressure to US as debt ceiling issues return to focus

Tom Tong22/Nov/2011Currency Updates

GBP

Sterling fell to a six-week low against a firm dollar on Monday and struggled against the euro as investors shunned riskier assets, though anxiety about euro zone debt contagion is likely to limit losses against the common currency. The dollar index rose to a six-week high as investors sought safe haven from the euro zone crisis, while the failure of U.S. leaders to agree to deficit-cutting measure led to a broad sell-off in riskier assets and currencies. Sterling was also vulnerable from a fragile UK economy and the likelihood of further Bank of England asset purchases. Latest data showed speculators had added to their bearish positions on sterling in the latest week to Nov. 15

Data showed on Monday that UK shopper numbers between August and October fell at the fastest rate since last December’s heavy snow, as cash-strapped Britons tightened their purse strings. Britain’s Prime Minister David Cameron acknowledged that slow growth is making it harder than expected for the country to cut its deficit, but even a temporary fiscal stimulus to boost the economy would be “dangerously wrong”.

The UK still retains its AAA credit rating, mainly because it has been trimming expenditure and is trying hard to get its debt under control by following a tight fiscal policy.

EUR

Michael Heseltine, the former deputy Prime Minister, and now the advisor to David Cameron said on economic growth yesterday, ” I think the chances are the euro will survive because of the determination, particularly of the French and Germans.” However, his 1950’s views do not reiterate the fact that the French have been hit by a rise in its debt yields and sluggish growth whilst the Germans, as the EU paymaster, has rejected most of the widely-touted solutions to the debit crisis. Spain’s rising bond yield is not helped by the new Prime Minster-elect, Mariano Rajoy, resisting pressure to outline a solution to their economic problems. The crisis is hitting the core of the euro zone on a daily basis and it is all about risk aversion rather than solutions. Trading of the EUR/USD fell 0.2% with traders speculating that we’ll see the euro lower.

USD

As there is no change in risk appetite the dollar remains the safe haven of choice and it held gains near a 6 week high against a basket of currencies.

U.S. lawmakers failed to come to an agreement to cut the deficit which hit market confidence causing US stocks to fall 2% and this continued to show in the Asian markets which also edged downwards. Investors minds were somewhat eased last night as credit ratings agencies Moody’s and Standard and Poor confirmed that this failure by lawmakers would not trigger a downgrade of the US credit rating….for now at least! Chinese comments rang true as Wang Qishan, the Chinese Vice Premier gave warning to the state of the global economy and in looking to aid waning growth the Chinese are looking to spend $1.7 trillion on strategic sectors over the next 5 years.

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Written by Tom Tong

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