EFSF bailout fund downgraded by S&P as euro woes continue

Tom Tong17/Jan/2012Currency Updates

GBP

Movements in sterling were limited in the aftermath of the ratings cuts from Friday and with no UK data scheduled for release yesterday, the pound’s performance was as ever, dominated by developments in the euro zone. Sterling traded within sight of a near 18-month low against the dollar on Monday and looked likely to stay subdued as investors concerned about the implications of mass sovereign downgrades in the single currency region, favoured the safe haven U.S. currency. The pound was firm against the euro, however, and hovered close to a 16-month high as the downgrades coupled with fresh concerns about a Greek debt default weighed broadly on the single currency.

Sterling has benefited from safe-haven flows as bond investors reduced exposure to euro zone government debt and bought UK gilts instead. The yield on British 10-year gilts fell to within a whisker of a new record low on Monday after the S&P downgrade. In addition to this, George Osborne’s push to make London a leading offshore trading centre for the renminbi highlights the opportunity for Britain to prosper from China’s growing role in international markets.

EUR

Standard and Poor, the U.S. credit rating agency, yesterday cut the eurozone’s EFSF rescue fund while Greece was under pressure to ease on animated talks on debt swap policy default.

Germany is now the only Eurozone country to retain its triple A rating, she has pledged 211billion to rescue the fund. French Finance Minister Francoise Baroin doesn’t think that the downgrade of the fund from triple A to AA+ will affect the funds ability to reach capacity. However if we see other rating’s agencies such as Moody’s follow Standard and Poor’s predictions of default it may affect other single currency zone countries from raising the additional 200billion needed. The Portuguese bond auction this morning may show a grim reality.

USD

The dollar weakened against most of their major counterparts after China’s gross domestic product expanded more than economists estimated and as advances in Asian stocks reduced the appeal of haven currencies. Other major currencies are expected to rise as demand for commodities will be sustained in China, the country’s biggest export market.

The stronger-than-expected China GDP helped boost risk sentiment in the markets a little bit on otherwise flat day of trading, however this helped riskier assets such as the Aussie dollar and stocks are higher, while the dollar and yen are being sold due to its safe haven appeal.

The dollar lost 0.5 percent per euro, breaking a two-day gain. The greenback slid 0.2 percent to 76.66 yen, This is largly due to U.S. markets being closed yesterday for a holiday.

U.S. data today is projected to show manufacturing in the New York region expanded in January at the fastest pace in eight months.

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Written by Tom Tong

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