Fresh eurozone concerns were compounded by disappointing US economic data, accelerating a flight into safer assets such as the US dollar and yen which seems to be turning more aggressive by the day. Rating agency Moody’s delivered a fresh blow to European leaders by downgrading 16 Spanish banks, having just taken similar action against banks in Italy. With markets already concerned by the growing cracks in the Spanish banking sector and the Spanish government’s soaring borrowing costs, investors now fear Spain may soon require a Greece-like bailout. In response, traders sent the euro tumbling to new four-month lows versus the US dollar. The greenback’s advance was slightly surprising after dreadful US manufacturing data increased the chance of more Federal Reserve monetary easing. Still, broader risks such as global growth and Europe’s crisis encouraged investors to keep a close hand on the safe haven dollar. The yen on the other hand did take advantage of the greenback; breaching three-month high’s only to then be shackled by another intervention warning from Japanese officials. Sterling tanked to March low’s against the US dollar and is in danger of losing further ground following depressing Bank of England inflation report that has stoked concerns of more quantitative easing. Currencies tied to global growth and exports, particularly across Asia, were also hit hard. Thailand’s baht and Malaysia’s Ringgit tanked whilst the Indian Rupee fell to an all-time low.
Sterling
The pound spent another session on the defensive, under pressure from the Bank of England inflation report that offered a depressing outlook for the British economy. Not only did policymakers downgrade their growth forecasts, but Governor Mervyn King also emphasized the UK’s exposure to Europe’s current crisis. Sterling is now in danger of revisiting March lows against the US dollar having fallen by almost 2.5 per cent in value this week. The pound also tumbled by over one per cent against a currency basket, reflecting concerns the pound may have been overbought in recent weeks and the UK economy is more exposed to European risks than previously thought.
US dollar
The US dollar fell against the Japanese yen but rose sharply in almost every other currency cross after disappointing US economic data served as further evidence the world’s number one economy was slowing and may require another cash-boost from the Federal Reserve. Nonetheless, rather than sell the US dollar on anticipation of more Federal Reserve quantitative easing, the greenback rose broadly with currency traders more concerned by the global growth picture than US monetary policy.
Euro
The euro suffered another battering as fears of Greece eventually dropping out of the eurozone following new elections on June 17 continued to spill over into the region’s banking sector with Spain now firmly on the radar as possibly the next member of the monetary union that will require a bailout.