Bailout fears increase as Spain downgraded whilst Bernanke rejects QE

Tom Tong08/Jun/2012Currency Updates

EUR

The euro was lower against the dollar and yen during Asian trading this morning as risk sentiment took a hit from comments by Federal Reserve Chairman Ben Bernanke, who on Thursday stopped short of signalling that the Fed would take imminent action to support the U.S. economy. Meanwhile authorities in Europe’s emerging economies are girding for the possibility of serious market turmoil in the event of a Greek exit from the euro zone, which could drive down currencies, tighten credit and slam the brakes on export-driven growth.

Government officials and central bankers in the European Union’s eastern wing say they are in better shape to weather any storm than they were four years ago when the collapse of U.S. investment bank Lehman Brothers sparked a global financial crisis. But they are still vulnerable. Investors fearful that Greek elections next week will spark Athens’s disorderly departure from the euro have already been selling Polish, Hungarian, Romanian and Czech assets, hitting local currencies and stock markets.

Fortunes couldn’t have been more different in Paris and Madrid yesterday, or at least of the government bond markets of Spain and France. Most explanations point out that France doesn’t have a real-estate bubble that has crippled large parts of its banking sector, as Spain does. That’s no small difference because the extent of the property collapse is as yet unknown. Even assuming Spanish banks are credibly recapitalized, with the probable help of a loan from the euro-zone bailout funds, there will be uncertainty about how much further real-estate prices will fall and what any future damage to the finances of the Spanish government will be.

GBP

Sterling hovered near a one-month low against the euro and dropped to a seven-week trough against a trade-weighted basket of currencies early yesterday, however this was short lived until PMI data and BoE rates were released. Sterling later rose to a one-week high against the dollar yesterday after the Bank of England opted not to extend its asset purchasing programme and China unexpectedly cut interest rates, boosting riskier currencies. The BoE move was widely expected though a growing minority of economists had tipped another bout of quantitative easing following a run of weak data, including figures showing the recession in the UK was deeper than earlier thought. The UK economy was boosted slightly by better than expected Services PMI data, which further increased demand for the currency.

USD

The Dollar Fell on Thursday, pushing the Euro to increasing levels, following the FED’s President Ben Bernanke’s testimony, before congress’s joint economic yesterday evening. Bernanke said “the situation in Europe poses significant risks to the US financial system and economy and be monitored slowly”, highlighting the problems in the Eurozone have had knock on effects to all paired currencies. The dollar came under some pressure earlier on yesterday as China announced it would cut its key interest rates by a quarter point, amid slow growth in the world’s second largest economy. Unemployment Claims data came out slightly less than expected, however not enough to make a significant impact on the currency, especially in light of other news.

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Written by Tom Tong

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