Optimism around Spain’s rescue loan for its troubled banks quickly evaporated with investors still seeking clarity on the mechanics of the deal whilst growing concerned that adding to Madrid’s debt will prove to be detrimental in the long-term. Spain had earlier asked euro zone governments for a loan of up to €100 billion to safeguard its banking sector. Market reaction was one-way with stocks falling and risk-taking in currency markets drying-up. The euro slumped accordingly, especially against the US dollar and British pound, whilst other units that tend to track global sentiment such as growth-linked or emerging-market currencies also fell.
Sterling
Traders quickly put a stop to risk taking on concerns that a loan for Spain’s banks will not be enough to reinforce Madrid’s shaky finances while investors also began to re-examine Italy’s financial health. As a result, sterling inevitably dropped against the haven US dollar but rose sharply against the euro to reach one-week highs.
US dollar
After dropping to three-week lows against the euro on initial hopefulness about Spain’s loan from euro zone governments, the dollar erased almost two per cent of those losses to finish the day near one-week highs. Unless euro zone governments can convince markets that they have more firepower and are willing to use it, the safer dollar may continue to advancing from here.
Euro
The euro is back under selling pressure after further evaluation of Spain’s emergency loan to help prop up its banking sector left investors still feeling doubtful. Firstly, details about where the funds will come from are lacking and will be crucial for investors to assess Spain’s creditworthiness. Secondly, economists are widely concerned that the deal is yet another short-term fix and has not safeguarded Spain’s long-term future; a bigger bailout is still possible.
Japanese yen
The yen unexpectedly sank against the majority of its main trading partners, including the under-fire euro, after comments from the International Monetary Fund heightened concerns Japan will soon intervene in currency markets to weaken the yen.