Europe’s debt crisis continues to dominate headlines in currency markets after China announced that it is willing to offer more support in order to maintain stability across the eurozone. The pledge helped offset another setback in attempts to save Greece from bankruptcy. Following Moody’s decision to downgrade six European nations, investors are slowly turning away from risk taking and rebuilding their defensive US dollar positions. The dollar rose to three-week highs overall, supported further by a disappointing US retail sales report that added to an already cautious tone. Sterling unsurprisingly continued to suffer the effects from Moody’s warning that Britain’s top credit rating is at risk of a downgrade. An upbeat consumer sentiment report from the Australian economy, coupled with better-than-expected retail sales data from New Zealand, is helping to support high risk currencies despite the overall “risk-off” feeling in financial markets.
Sterling
The pound continued to feel the effects from Moody’s warning that the UK is at risk of losing its triple-A investment grade should economic conditions deteriorate further. After falling to two-week lows against the US dollar, sterling sentiment softened even more following data showing another sharp drop in British consumer price inflation.
US dollar
The US dollar rose to three-week highs against a basket of currencies as investors grow increasingly concerned by Greece’s inability to secure its next emergency loan after months of delays and political wrangling. The real prospect of the Greek economy collapsing as early as March, when significant bond redemptions come due, kept investors on edge which favoured the safe haven dollar.
Euro
The People’s Bank of China announced that it will continue to support Europe’s fight to end the debt crisis while stating that other major emerging-market economies understand the importance of maintaining stability across the eurozone. China’s pledge helped offset another blow for Greece in its bid to secure more loan money, the prospects for which seem to be changing now on a daily basis. Eurozone leaders have cancelled the meeting with Greek officials raising concerns Athens has come up short with its latest austerity package yet again and will not receive anymore bailout cash. Surprisingly, the euro held up pretty well, comforted by encouraging investor sentiment report and the fourth quarter growth data, both from the German economy, which came in above market forecasts.
Japanese yen
The Japanese yen fell by an astonishing 1.2 per cent against the US dollar, reflecting the markets apprehension after the Bank of Japan set an inflation target of 1 per cent in addition to expanding its asset purchases by 10-trillion yen.
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