Anxiety in markets is growing after rating agency Standard & Poor’s delivered another downgrade to Spain’s credit rating. Additionally, the European Central Bank has again been forced to intervene in bond markets in order to protect Italy. Italian Prime Minister Silvio Berlusconi and his government won a confidence vote but uncertainty is weighing on the eurozone. Consequently, the single currency came under pressure as investors decided that the euro’s rapid appreciation since reaching almost nine-month lows just last week was a good point to take profit. The US dollar and yen rose sharply as investors became noticeably risk-adverse, while sterling was unable to benefit from encouraging UK export data.
Sterling
In spite of recent optimism, traders again put up their guard against global threats and shifted back into currencies offering more protection. Sterling backtracked sharply against both the US dollar and yen as a result, but movements in other crosses were a little more subdued.
US dollar
A mild improvement in US data along with encouraging news from China have helped to calm investors’ nerves for now. At one stage, the dollar looked certain to attract another strong wave of demand from risk-adverse behaviour on concerns that Europe may ask private investors to accept heavy losses on government debt in response to solving the region’s crisis. However, US weekly jobless claims dipped while the nation’s trade deficit narrowed. In addition, consumer price inflation eased in China which will relax pressure on the People’s Bank of China to tighten monetary policy.
Euro
As expected, nerves finally kicked in and traders decided that the euro’s lofty levels were a good opportunity to cash in and the single currency accordingly fell by over one per cent on the day from its highs against the US dollar and yen. A statement released from the European Central Bank also dampened the mood by warning markets that if eurozone leaders expect private investors to accept losses on government debt as part of their solution, confidence in the single currency area could plummet.
Japanese yen
Over the past few days the yen has traded sideways in major crosses to an extent, meaning that there have been fewer large moves in either direction. Eurozone jitters saw the yen move sharply higher before comforting news in both the US and Asian session leaves the yen pretty much unchanged.
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