Political turmoil in Spain and Italy weakens the appeal of the Euro as cable approaches a five week low

Tom Tong05/Feb/2013Currency Updates

GBP

Last week saw the British pound decline for a fourth week in a row against the euro in the week just ended, its longest downward streak since September last year.

Sterling is at a 15-month low against the euro. This morning has seen the pound weaken further against the dollar, approaching the lowest level in more than five months, before a report that economists said will show U.K. services shrank for a second month in January. The pound has weakened 3.7% this year, the second- worst performer behind the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has strengthened 2.3% and whilst the dollar has seen a 0.2% drop.

EUR

The Euro fell against the yen, following yesterday’s drop which was the biggest since June, amid corruption allegations against Spanish Premier Mariano Rajoy and uncertainty ahead of Italian elections this month.

Reports that former Italian Prime Minister Silvio Berlusconi was gaining ground ahead of the Italian elections weighed on the currency, as did the corruption allegations which led to an increase in Spain’s borrowing costs. The 17-nation currency halted this year’s climb against the dollar before European Central Bank policy makers meet on Feb. 7 Wells Fargo believe the Euro may move to 10 week lows over the coming year against the dollar.

The San Francisco bank revised its forecasts saying that the improving bond market in Italy and Spain and less dovish language from the European Central Bank put the shared currency on a stronger footing versus the dollar than previously expected.

USD

The news surrounding Italy and Spain had a positive impact for the dollar, as investors pulled towards the greenback as a safe haven.

The ICE dollar index DXY +0.61%, which measures the greenback against a basket of six major global currencies, climbed to 79.712 from 79.589 in North America late on Monday. Many forecasters believe the dollar is entering a bull market, but not due to any merits of its own.

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Written by Tom Tong

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