Rajoy agrees to nationalise Bankia as worries over a Spanish bailout continue

Tom Tong10/May/2012Currency Updates

GBP

Yesterday was a successful day of trading for the Pound as it continued making gains versus the Euro. As a result of continued political and economic worries emerging from the eurozone, sterling hit a its highest point against the single currency in three and a half years. With the on going problems in the Spanish banking sector and questions over relations between France and Germany after the French presidential election, many investors are opting to purchase the UK currency for its safe haven appeal.

Sterling dropped to a two week low against its American counterpart on Wednesday as eurozone concerns continued to linger and investors awaited the Bank of England rate decision. Although policy makers are expected to keep rates on hold and the quantitative easing unchanged at 325 billion Pounds, some still believe that extended asset purchasing is not out of the question due to weak recent UK growth numbers and signs that the global economic recovery may still be stalling.

EUR

Yesterday saw the single currency experience renewed downside pressure during its afternoon trading session losing major ground against both the Pound and Dollar. Critical comments came out of the eurozone from the Spanish Prime Minister Mariano Rajoy when he suggested that he feels Greece will eventually leave the Euro after it again failed to form a government for the third day running. This kind of opinion has increased expectation that the Euro will indeed continue trading on a highly negative footing moving forward.

Adding to the ever increasing European woes, Spanish yields tied to the region’s 10-Year debt breached the 6% mark, thus fueling speculation that Spain will ultimately seek a bailout as it struggles to tap the financial markets.

In order to contain the escalating crisis and restore faith in the country’s management, Spain yesterday nationalised the crippled Bankia. The Spanish Prime Minister was forced to rescue the bank after auditors Deloitte refused to sign off its books, amid allegations of €3.5bn (£2.8bn) of inflated assets.

USD

The Dollar seemed to be the big winner yesterday in the currency markets as it managed to make positive gains against many of its major counterparts. The safe have appeal offered by the Greenback has enticed many investors away both from the continued uncertainty and debt plaguing the eurozone.

The increased purchasing of the Dollar has in turn caused negative effects on certain commodity markets, particularly that of gold. Gold fell for a third day on Wednesday, touching a four-month low and virtually wiping out the gains it had managed so far this year. It seems the dynamic of this trend is purely due to the impact of the crisis on the FX markets, which has directly decreased the price of gold.

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Written by Tom Tong

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