Sterling looks to benefit from Euro zone uncertainty

Tom Tong11/Apr/2012Currency Updates

GBP

Sterling rose to its highest in more than 13 months against its currency basket on Tuesday and stayed near a three-month high against the Euro, as unease about the Euro zone debt crisis prompted investors to switch to the UK currency, with the Euro under pressure against the Dollar and Yen, rate spreads are moving in favour of Sterling.

Sterling is benefiting from safe haven-related flows from the Middle East.

Interest rate spreads between safe-haven 10-year UK gilts and German Bunds narrowed slightly to 39 basis points on Tuesday, due to expectations that the Euro zone economy will continue to struggle while the Bank of England is unlikely to resort to more quantitative easing soon.

Against the Dollar, Sterling was lower with the Dollar and the Yen benefiting from a drop in appetite for riskier assets like stocks.

EUR

The Euro slipped to an overnight low as heightening finance costs across the periphery countries raised the threat for contagion, and the single currency is likely to face additional headwinds over the near-term.

Bank of Spain Governor Miguel Angel Fernandez Ordonez warned commercial banks may require more capital if the “economy worsened more than expected”, and went onto say that the region is likely to face a protracted recovery as the government sees the growth rate contracting 1.7% in 2012.

The bad news continues with the yield on Spain’s benchmark 10-year bond jumping above 5.9 percent, the highest point since November. The rate was below 4.9 percent in early March. Rising yields are a sign that investors are less confident in the country’s finances.

USD

The Dollar continued its retreat against the Yen after last week’s US employment data showing a slowdown in the pace of job creation stoked speculation about further stimulus measures to keep economic recovery on track, with investors continuing to favour the Japanese currency’s haven properties.

Gold and Silver are expected to trade lower today on account of strength in the US Dollar index, as a stronger Dollar makes Dollar denominated commodities look expensive for holders of other currencies.

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Written by Tom Tong

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