Friday, June 25, 2010

Bad Dream Europe Can’t Wake From

Britain is obviously not a member of the Eurozone. Sterling has just reached a 19 month high against the common European currency, touching 1.2222 before falling back; not because the markets were convinced by the recent UK budget, but because of continuing uncertainty about the Greek debt crisis. Despite an IMF/Eurozone bailout package designed to ensure that Greece can meet its obligations, doubts that Greece will default on her debts refuse to go away. Greece is hardly the engine of the European economy and other, much larger economies on either side of the Pacific Ocean have vastly larger debts, but the focus seems to remain fixed on Greece.
Concerns about Greek sovereign debt sent all of the European markets lower today. The FTSE and Dax closed down by about 1.5% whilst the CAC40 in Paris dropped 2.4%.
Sterling has risen by about 20% against the Euro since December 2008. Part of the most recent rise has been attributed to the emergence of a split within the Bank of England over whether or not to hike interest rates. The majority still opposes such a move, but the fact of the divided opinion was taken to mean that a move to higher rates would be on the cards sooner rather than later. If the UK were to move to a higher interest rate policy, it would make Sterling a more attractive investment to Forex traders since yields would be higher.
The value of Sterling has not appreciated significantly against the Dollar, tending to suggest that the current strength of the currency relative to the Euro is due to the perceived weakness of the common European currency.


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