EUR/USD hits two year low as sovereign debt woes continue

Tom Tong30/May/2012Currency Updates

EUR

The common currency traded on a 22 month low. The main talking point was how to fund the recapitalization of Bankia as increased concerns over the monetary union’s sovereign-debt crisis was deepening. Right now it’s suggested that instead of buying a 90 percent stake, the Spanish government will hand over billions of bonds as a substitute which is seen as high quality collateral by the ECB. This will then lead Bankia to source money from the ECB for the following cash injections.

Worries over the Spanish banks kept its government’s borrowing costs very high, with data showing the budget deficit is rising as the state gives more money to cash strapped regional authorities, with Bankia now telling regulators that it is seeking to raise €55bn in debt over the next five years. Inflation within the eurozone declined with hopes that there would be further interest rate cuts. Retails sales also plummeted at a record pace, figures showed yesterday, with the recession continuing to bite. On the brighter side we did see the European markets close on one week high.

GBP

Sterling was reasonably steady, however staying vulnerable against the dollar off worries about Spain’s banking sector. We saw little reaction from the retail sales which jumped in May, with the greater than initially estimated contraction of the UK economy in the first quarter still weighing on sentiment. If we do see more QE from the BoE, we could see the brakes put on further sterling gains against the euro. We saw a rebound within retail sales in May. Strong sales represent a rebound from April where the balance was six percent down. Healthy growth will help the economy widely.

USD

The dollar index, which measures the Greenback against a basket of six major currencies, surged to 82.468 from 82.228 on Monday as the global reserve currency continued to benefit from strong safe haven flows. The dollar had lost support earlier in the session following a report that showed US consumer confidence unexpectedly fell this month. However the dollar’s safe have appeal returned shortly after reports that Egan-Jones downgraded Spain’s credit rating to BB- from B. The 10-year Spanish government bond yield also struck a new six-month high on Tuesday.

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Written by Tom Tong

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