German Bund yields go above UK treasury bonds as the UK remains a safe bet
25/Nov/2011 • Currency Updates•
The euro softened as German Chancellor Angela Merkel said she sees no reason for euro bonds. Euro bonds “would weaken us all,” she said, speaking at a news conference in Strasbourg. This caused the currency to fall to a 7-week low vs the greenback as Italy prepares to sell bills today after the country’s two- year yield soared to a 14-year high yesterday.
Ms. Merkel was meeting with the leaders of France and Italy to discuss the crisis that has engulfed the 17-nation euro zone and has even begun to drive up German bond yields. She described the process as difficult, and said trust had been lost. She added, however, that European leaders trust each other, and will work closer on issues.
Meanwhile a key part of the world’s foreign-exchange trading infrastructure is bracing itself for the possibility of a breakup of the euro zone, the latest sign investor concerns about the Continent’s debt crisis are on the rise. CLS Bank International, which operates a platform in which banks settle most of their currency trades, is running “stress tests” to prepare for the possible dissolution of the euro, according to people familiar with the situation. Some of the 63 banks that co-own CLS are making similar plans. “We always plan for contingencies,” said a senior executive at one of the largest currency-dealing banks.
The dollar climbed against most major peers, extending this week’s gains, as investors sought the safest assets on concern economies in the euro area will worsen as leaders struggle to halt the region’s debt crisis.
The dollar rose against the yen before a U.S. report next week forecast to show consumer confidence improved.
“Risk sentiment is still pretty poor as there doesn’t seem to be one clear solution that will be swift for Euro,” said Besa Deda chief economist at St. George Bank Ltd. in Sydney. “The U.S. dollar would get some support in this environment particularly, as the euro is out of favor.”
Sterling lost ground against most other major currencies yesterday as investors looked elsewhere for a greater return. This could be explained by the bleak outlook of Britain’s housing market as economic growth falters and unemployment is on the rise. Signs that the debt crisis is affecting Germany will have a knock on effect on the UK. UK Trade Secretary Green announced today that he intends to boost export manufacturing to reduce the trade deficit. Economic data for next week is minimal and Sterling may continue to weaken.