S&P throw a spanner in the works as they threaten to downgrade 17 Eurozone nations

Tom Tong06/Dec/2011Currency Updates

USD

In response to pressure from Wall Street, the White House and central banks in Europe, the Federal Reserve last week drastically cut interest rates for currency swaps to benefit troubled European banks, flooding the world markets with more dollars. However on the back of this US stocks have closed modestly higher after a reported threat to Germany’s credit rating deflated a morning market rally.

Economic activity in the non-manufacturing sector grew in November for the 24th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business. The Non-Manufacturing ISM Report On Business; Business Activity Index at 56.2%;New Orders Index at 53%; Employment Index at 48.9%

EUR

The 17-nation currency traded a relatively narrow range against the dollar as S&P rating agency said Germany and France might be stripped of their AAA credit ratings. However seeking to restore confidence in the euro, the leaders of France and Germany jointly called on Monday forchanges to the European Union treaty so that countries using the euro wouldface automatic penalties if budget deficits ran too high, on the back of this Stock prices rose and borrowing costs for European governments such as Italy and Spain dropped sharply by up to 50 percentage points to 6.1% as Monti’s ‘Save Italy’ package which entails a 30billion euro austerity measure, went some way to convincing investors that its new technocrat leader could put the embattled nations finances back in order. There is optimism in the market as people are positioning themselves on the off chance that leaders may come up with something tangible. The big news this week is that the European Union’s are set to govern treaties to tighten economic cooperation in the region.

On the other side of the financial spectrum the Eurozone service sector activity shrank further in November, led by a sharp contraction in Spain. Italian service-sector firms also continued to see a sharp fall in business, while Germany has stagnated. The latest Eurozone services Purchasing Managers’ Index registered a level of 47, only slightly up from October. Levels below 50 imply falling activity.The index, which is based on a business survey, adds to indications that the Eurozone economy is in recession.

GBP

Sterling rose against a broadly weak dollar on Monday, tracking a rally in the euro after an agreement between France and Germany on proposals to help solve the euro zone crisis raised confidence in currencies perceived to be higher risk. The pound was also supported by better-than-expected services PMI data, although it remains vulnerable to selling due to an overall gloomy view of the UK economy. Many in the market are hopeful this may be the week that will mark a turning point in solving the debt crisis, which may put upward pressure on the euro. If the euro crisis appears to get closer to a solution, sterling will benefit (against the dollar).

A lasting solution would ensure that euro zone consumers will continue to buy UK exports, he added, which will help to support Britain’s economy and in turn, the pound. Sterling rose 0.7 percent on the day to a session high around $1.5721. Demand from Middle Eastern investors had supported the pound early in the session, traders said.

The pound was supported after data showedactivity in the dominant services sector, which makes up the majority of UKGDP, picked up slightly to 52.1 in November from 51.3 the previous month, wrong footing forecasts of a slowdown.

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Written by Tom Tong

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