Daily currency report

Having been afforded a little breathing space by constant guesswork around the Federal Reserve’s monetary policy plans over the past few days, the euro looks set to take centre stage in foreign exchange markets as German lawmakers will take a vote on Spain’s desperately needed €100 billion rescue loan for its ailing banking sector and there is every chance that Berlin’s answer could be detrimental for the euro area’s fourth biggest economy. Uncertainty has already given the yen a safe haven boost while the Australian dollar clocked a new record high versus the single currency helped by interest rate differentials, rising stock markets and a jump in commodity prices. Conversely, the US dollar’s upside remained capped after Fed chairman Ben Bernanke kept alive talk of quantitative easing. also wobbled after Bank of England minutes appeared more dovish than investors had expected. However, both currencies could come back strongly depending on how events in impact ’s sovereign bond markets.

Sterling

The pound fell by as much as 0.5 per cent after minutes from the Bank of England’s July 4-5 meeting portrayed a committee growing more concerned about ’s economic outlook which could lead to even looser monetary policy. Yet, despite the notes detailing preliminary discussions about a potential interest rate cut, sterling surprisingly bounced back in currency markets.

US dollar

The US dollar slipped to six-week lows against the Japanese yen and is looking fairly unstable against its more risky rivals after a combination of monetary easing talk, robust US economic data and rising equity markets weighed on the greenback. Ben Bernanke spent another day assuring lawmakers that the Federal Reserve has a stimulus plan in place should the economy’s recovery falter. Bernanke’s remarks kept in place bets of another round of dollar-negative asset purchases at some point this year while signals of more “easy money” gave stocks and risk taking a boost at the expense of the safer dollar.

Euro

The euro is in danger of revisiting recent record lows against the British pound and US dollar ahead of a vote in Germany on Spain’s €100 billion bailout for its broken banking sector. Following cautious comments from German Chancellor, Angela Merkel, there is a real fear that politicians in Berlin will demand more commitments from the Spanish government before signing-off on anymore aid. Any outcome that could negatively impact ’s borrowing rates, which are already floating near bailout territory, could see the euro come under renewed selling pressure.