Portugal and Greece added the risk aversion due to downgrading

Thursday, April 29, 2010

The Euro hit a new 12 month intraday low yesterday after Standard & Poor’s downgraded its debt rating on Spain, compounding sovereign debt fears just as a resolution to Greece’s aid package seemed imminent.

The Euro traded at as low as $1.51240 as concern that Europe’s deficit crisis may widen damped the appeal of assets in the 16-nation region. A cut to Spain’s credit rating yesterday, coming after downgrades this week to Portugal and Greece exasperated fears that the Euro Zones debt crisis is spreading. Standard & Poor’s cut Spain’s credit rating to AA from AA+ and said the outlook on the country’s debt is negative. This move comes just two days after the rating agency sliced Greece’s borrowings to junk and reduced Portugal’s to the third-lowest investment grade. The extra yield investors demand to hold Spain’s 10-year debt rather than German equivalents widened to 112.5 basis points this week, the most in more than a year.

Europe’s single currency fell for the third time in four days against the greenback after the IMF said in its Regional Economic Outlook report that the “main risk scenario” from Greece’s debt crisis is “one of worsening global risk aversion, should the jitters spill over to some of the larger European economies.” Moreover, as concerns about a domino effect spread officials said a joint IMF EU rescue package could now total up to €120billion ($150 billion) over three years – nearly three times the amount recently pledged – as the IMF urged reluctant German lawmakers to move quickly in approving support for immediate financial aid.

Investors are abandoning the euro at a rate not seen since the collapse of Lehman Brothers Holdings Inc. as Europe’s worsening fiscal crisis threatens to splinter the 16-nation currency union. After reaching a new 12-month low against the USD, the Euro managed to recover slightly in the North American trading session to close at $1.52003, down 0.29% from its opening price.
This morning, Germany will release its latest figures for the unemployment change. A significant drop in the number of unemployed people was reported last month – 31,000. Economists are optimistic this time, and predict another drop of 11,000. A better than expected number could provide some stabilizing relief for the falling Euro.

Britain’s currency, also affected as by news of the Spanish downgrade, tumbled to a low of $1.51240 yesterday. The GBP/USD recovered slightly to close at $1.52443, down 0.29% from its opening price in the forex online market. This morning, a report by the Nationwide Building Society showed that housing prices in U.K rose by 1.0% in April from March. According to Nationwide data, this marks the second consecutive monthly rise of 1.0% rise, leaves house prices up by 10.5% on an annual basis.

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