The euro’s outlook is back under a dark cloud after Moody’s Investor Service announced yesterday it had downgraded the credit rating of Spain, Italy, Portugal, Malta, Slovakia and Slovenia. Although the decision comes as no surprise following Standard & Poor’s mass-downgrading in January, the move will put eurozone governments back under the spotlight. The single currency sank in response while the US dollar rose broadly as investors quickly turned risk averse. The safer yen found limited support whilst dropping to three-week lows against its US counterpart after the Bank of Japan unexpectedly expanded stimulus measures following its monetary policy meeting. Policy makers responded to a rapid deterioration of local fundamentals and an increase in deflationary risks that have been exacerbated by the yen’s recent strength. The pound also tumbled versus the US dollar after Moody’s went further by placing UK, France and Austria on negative watch which may lead to Britain losing its coveted AAA rating. The New Zealand dollar led commodity-linked currencies lower after the country’s finance minister expressed his concerns with the kiwi dollar’s export-crimping strength.
Sterling
The pound sank to a two-week low after ratings agency Moody’s placed Britain’s triple-A investment grade on negative watch after downgrading a number of eurozone members. The decision drew an immediate response from Chancellor George Osborne who assured markets the government’s unpopular fiscal squeeze will help Britain avoid a downgrade.
US dollar
The US dollar soared across the board after Moody’s Investor Service downgrade boosted demand for defensive currencies. The greenback was also helped by the Bank of Japan’s decision to expand its stimulus program, sending the dollar to three-week highs versus the yen by increasing its allure as a more stable safe harbour.
Euro
The euro failed to garner any real upward momentum despite politicians in Greece voting in favour of more rigorous budget cuts which are compulsory if Athens wishes to receive anymore loan money from international authorities. Instead, traders grew cautious amid signs of discontent among European officials who appear to have finally lost patience with Greece and may still reject any new promises at a meeting between eurozone officials this week.
Japanese yen
The Bank of Japan reacted to a rapid decline in Japanese economic fundamentals by unexpectedly expanding stimulus measures by 10 trillion yen. Governor Masaaki Shirakawa had been under pressure from Tokyo’s hierarchy to do more with monetary tools after exports fell at a record pace last December.
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