The euro is struggling again and is holding on to recent highs after a rise in Spain’s borrowing costs highlighted the serious risks it is facing on the debt crisis over the coming months. Spain’s gloomy fiscal outlook could prove to be another pothole in the euro’s road to recovery, and the prospect of a Spanish bailout also seems to be tempering the markets’ appetite for risk. Stocks declined while in currency markets the British pound rose as the US dollar’s fallout from last week’s Federal Reserve announcement also continues. Trading in the yen is also expected to remain uncertain ahead of the Bank of Japan policy decision; however, some analysts are expecting a quick recovery for the yen should the Bank of Japan resist temptations to introduce more monetary easing. The Australian and New Zealand dollars are weaker after dovish Reserve Bank of Australia meeting minutes, although currencies perceived to be risky could rebound following sentiment report from the eurozone.

Sterling

The pound outperformed its peers and could recover further ground against the euro as worries about its fiscal condition resurface and before a report expected to show inflation pressures on British businesses easing. Sterling has now added almost a cent to its value versus the euro after dropping close to three-month lows on Friday.

US dollar

Uncertainty going into the Bank of Japan monetary policy announcement has helped the US dollar to one-week highs against the Japanese yen, which is also supporting the greenback in other currency crosses. Nonetheless, the dollar still remains weak, falling to 4½-month lows against the British pound with investors still digesting the Fed’s pledge last week to maintain an unlimited bond-buying programme that can have a devaluation effect on the currency.

Euro

Spain’s borrowing costs are on the rise again as Madrid faces growing pressure from demonstrators warning the government against offering greater austerity measures in return for European Central Bank support. The euro is therefore likely to remain on shaky ground unless the closely-watched ZEW survey for September meets or exceeds forecasts.

Japanese yen

The yen slipped to fresh four-month lows against the British pound but would be expected to recover quickly should the Bank of Japan refrain from easing its monetary policy.

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