Italy has agreed to let the International Monetary Fund offer direct support in order to address the country’s dire public finances in what appears to be a desperate attempt to dampen speculation Rome will be next domino to fall in the sovereign debt crisis. Markets have shifted focus from Greece, where George Papandreou has agreed to step down as Prime Minister, to what this now means for the future of the eurozone. Following declines last week, the euro is immediately under pressure as investors run for shelter, seeking security in the US dollar, yen and pound. Demand for sterling as a safe haven has developed after UK third quarter growth figures did not collapse as some analysts’ had predicted while the Swiss National Bank warned markets that it stands prepared to take further action to weaken its franc. Japan has adopted a similar stance, leaving investors with very few liquid refuge investments.
Sterling
Increasing demand for UK government bonds, and the pound’s 2.7 per cent advance on the euro last week, is further evidence that investors are looking towards the British Isles for shelter from Europe’s debt troubles. Obviously, direct currency intervention from both Switzerland and Japan is a factor helping to channel support towards the UK.
US dollar
Concerns of a US recession look to have backed away for now following recent data, economic reports as well as slightly upbeat comments from US Federal Reserve Chairman, Ben Bernanke. Consequently, the dollar is likely to take advantage of a weaker euro over the coming days as turmoil in Greece threatens the stability of Italy and contagion spreads across Europe.
Euro
The cracks continue to widen as the eurozone teeters on the brink of collapse, underpinned by a number of headwinds which seem to be swelling by the day now. The single currency’s trade weighted index, fell by 2.2 per cent last week with European stocks also tumbling on bets Italy is now on the verge of economic failure. Political disaster in Greece, a nation unable to finance its own debt yet unwilling to accept outside help, has led to intense speculation over when the next domino of the sovereign debt crisis will fall. Meanwhile, the European Central Bank dramatically cut interest rates in response to a rapid deterioration of growth within the euro area whilst data strengthened calls for another European Central Bank rate cut as soon as December.
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