Euro gains short lived as Spanish borrowing costs creep above 7%

Tom Tong19/Jun/2012Currency Updates

GBP

Monday saw the pound strengthen versus the euro as Spanish borrowing costs soared to levels seen by many as unsustainable. However, the potential for further monetary stimulus by the Bank of England checked sterling’s overall gains. With Spain’s 10-year bond yields hitting a euro-era high of above 7 percent yesterday, fears were kept alive that contagion could ensnare larger eurozone economies. So far the euro has slipped a a huge 3.5 percent against the pound in 2012 as many investors have decided that investing into both the UK and Scandinavian countries is a safer bet than staying with the single currency considering its never ending economic worries.

With minutes due on Wednesday from the latest BoE meeting, sterling retreated from a four week high versus the dollar as it is predicted that policy makers are leaning towards further stimulus. More quantitative easing is usually considered bearish for the currency as it increases the supply of pounds in the system.

EUR

The euro fell on Monday as initial enthusiasm over a weekend victory for pro-bailout parties in Greek elections gave way to worry about the nagging debt crisis still facing the eurozone. All gains felt by the euro early yesterday due to risk assets fizzled out sharply and prices of safe-havens such as U.S. and German bonds, especially on the long-end, rose. The swift reversal in sentiment was also fueled by data showing bad loans among Spanish banks rose to their highest since April 1994.

With the 10-year bond yields finally surpassing the point that many feel as unsustainable, added pressure has now been placed on German Chancellor Angela Merkel at a meeting of world leaders to shift her stance on measures to shield the global economy. G20 leaders are gathering in Los Cabos for a summit being dominated by the crisis in the 17-nation euro region that threatens to further erode the weakest global economy since the 2009 recession. Spain’s Prime Minister Mariano Rajoy is also attending, as the respite in markets after elections in Greece yesterday proved short-lived.

USD

The dollar managed gains versus both the euro and the pound yesterday as many investors sought the American currency for its safe haven appeal as problems in the eurozone escalated and further QE is expected to be announced from the BoE on Wednesday. High hopes for the single currency following successful Greek elections on Sunday were short lived as problems coming from Spain increased worries of possible contagion to the other main economies within Europe prompting many investors to seek refuge within the Greenback.

Also in other news late on Monday morning, the Reserve Bank in the US released the minutes to its June 5th board meeting in which the cash rate was cut for a second month in a row. Mr Speizer said the market would also focus on Wednesday night’s meeting of the policy making committee of the US Federal Reserve, which is expected to discuss putting more stimulus into the American economy.

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Written by Tom Tong

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