Daily currency report
Overview
Investors are back in risk averse mode after Spain suffered another ratings downgrade, which economists see as another step in the direction of a Greece-style international bailout. Having already admitted that it is being frozen out of debt markets, Spain’s borrowing costs are now likely to rise further, persuading investors to resume the process of stockpiling safe haven assets, especially the US dollar. The greenback had come under pressure from the British pound after the Bank of England refrained from stimulating the British economy through more cash injections. China’s central bank, on the other hand, did make a move, surprisingly cutting interest rates for the first time since 2008 in an attempt to spur economic growth that also helped dampen the US dollar’s safety appeal. However, not only did the US currency later bounce back on renewed Spanish concerns, traders also unwound short, or negative dollar positions quickly after Federal Reserve Chairman, Bernanke, gave no clear signals that policymakers are preparing another shot of quantitative easing.
Sterling
The pound rallied to one-week highs after the Bank of England refrained from more monetary easing. However, the pound pared some of those gains after Spain suffered another ratings downgrade which served as another reminder for investors to trade cautiously amid an extremely uncertain global backdrop.
US dollar
Federal Reserve Chairman, Ben Bernanke, failed to give markets any clear indication that additional quantitative easing is “coming soon” in a statement to US lawmakers. In response, traders piled back into the US dollar after earlier selling the greenback on fears that a string of below-par employment indicators last month would force the Fed’s hand on additional stimulus measures.
Euro
The shared currency’s rally to 1½-week highs versus the US dollar is in danger of collapse after Spain suffered an aggressive ratings downgrade, which has put the nation’s precarious state of public finances back in focus. The euro seemed to have acquired a reasonably stable short-term platform following its slide over the past few months on hope that eurozone governments are working towards a more radical solution to end the regions banking crisis. That optimism grew after the European Central Bank offered no new stimulus measures following its policy meeting this week. However, action by ratings agency Fitch to lower Madrid’s creditworthiness to just above levels considered as “junk” has restored widespread speculation Spain is nearing an international bailout with no new emergency measures forthcoming as yet.