The euro climbed sharply after Cyprus finally agreed a deal with international authorities that will see the country secure a bailout and avoid bankruptcy. However, it remains to be seen how high the euro’s recovery will bounce if the bailout deal fails to stop a run on Cypriot banks when they officially reopen.
The US dollar opened weaker, with the safe haven currency having been firmly supported in recent days by the Cypriot crisis. However, with a deal now done, investors may slowly start to re-examine last week’s dovish Federal Reserve monetary policy announcement.
Sterling seems likely to continue its reconstruction in the days ahead following last week’s budget and Bank of England minutes that turned out to be less worrying for the currency than markets had expected, while the Japanese yen should find some support ahead of Japan’s fiscal year-end, which tends to strengthen the currency through repatriation flows.
Sterling
The pound seemed to have turned a significant corner last week, rising to three-week highs against the US dollar after minutes from the Bank of England and the Government’s latest budget caught markets somewhat surprised about future UK monetary policy direction. Minutes showed central bankers now becoming concerned with sterling weakness while Chancellor George Osborne made only minor tweaks to the BoE’s new monetary policy remit.
US dollar
The US dollar opened lower after Cyprus struck a last-minute deal with international lenders, a move that has seen the US currency’s more risky rivals subsequently rally overnight. Safety plays concerning the Cypriot crisis kept the safe haven US dollar mostly in command across foreign exchange markets last week. However, the US currency was not without pressure after chairman Ben Bernanke said the Fed was not yet ready to ease its non-stop stimulus strategy.
Euro
The euro jumped to one-week highs against the US dollar and may continue to advance as Cyprus put an end to fears it is headed for financial meltdown after the country’s President brokered a last-minute bailout deal with the European Central Bank, International Monetary Fund and European Commission – the so-called troika of lenders. The latest deal that was agreed will not need approval from the country’s Parliament, and will see Cyprus close one of its largest banks and restructure another to come up with the money it needs. However, uninsured depositors with the ‘at-risk’ banks will still face losses, a scenario that could still see a run on banks, and the euro weaken, when banks officially reopen.