A dispute between France and Germany over new anti-crisis measures surfaced and immediately sent investors running for cover. Stock markets tumbled while the US dollar and yen surged after French President Nicolas Sarkozy reported that a difference of opinion on how to increase the size of the EFSF, the eurozone’s backstop fund, is holding up negotiations. Currency markets are now poised for more turbulence with the euro expected to suffer from speculative attacks ahead of Sunday’s make-or-break EU summit. Emerging market currencies have come under heavy attack while growth and commodity linked currencies such as the Australian and Canadian dollars are back under pressure. Sterling surprisingly benefited despite dovish MPC minutes as investors quickly unwound risky bets which had earlier led to declines for the pound against higher yielding rivals.

Sterling

Despite more evidence of distress for the UK economy, the pound surprisingly powered higher across the board after it emerged that France and Germany are split on how to expand emergency measures for debt-strapped eurozone countries. As a result, market participants quickly unwound risky bets which had led to declines for the pound against higher yielding rivals.

US dollar

The US dollar surged higher across the board after Mr Sarkozy said plans to address the eurozone’s crippling debt crisis are at a deadlock. Markets instantly reacted to the update and moved aggressively back into the security of the dollar while stock markets tumbled. Equities were already under strain on more weak corporate third quarter profit reports while the Federal Reserve’s Beige Book report painted a rather concerning outlook for the US economy.

Euro

European officials moved quickly to deny newspaper reports France and Germany have already agreed to expand the eurozone’s emergency backstop fund to around €2 trillion. Nonetheless, investors took the euro higher on anticipation euro area politicians will take a major step towards containing the debt crisis at the EU summit this coming Sunday. Hopes of a resolution buoyed risk appetite and the mood in currency markets remained somewhat positive before news broke of a split between France and Germany. Investors immediately reacted by unwinding carry trades; placing the euro back under widespread pressure.

Japanese yen

Ongoing jitters from the euro area, and uncertainty over whether or not European politicians will act purposefully at the next EU summit, is keeping the yen within sight of recent record highs against the US dollar, euro and UK pound.

Travelex Global Business Payments Malta, freephone: 800 733 22, www.travelex.com/mt/

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