It was a turbulent day on the markets yesterday! Though EU officials had hoped that announcing an Irish bailout package would calm the markets and restore confidence in the euro, the opposite happened. Political uncertainty inside Ireland meant the markets were not reassured, and insurance rates for Portuguese government bonds rose to dangerous levels.
Given this EURUSD exchange rates fell to two month lows.
This morning meanwhile Germany has released the newest Ifo Business Climate figures. These are positive and indicate that business sentiment within Germany has grown more optimistic this month. However, far from easing concerns about the common currency, the release instead highlights the disparity between the German economy and those of EU periphery members.
Hence, though the Ifo numbers are positive, they are unlikely to allay fears about the euro.
Outside the EU meanwhile North Korea’s attack on South Korea’s Yeonpyeong Island added more fuel to the fire, and caused the dollar to spike. This happened because in moments of political uncertainty risk appetite is low, and the markets treat the dollar as a safe haven currency.
Hence both sterling and the euro fell against the dollar.
This North Korean development though is unlikely to impact the dollar on a long term basis: both South Korea and the US were quick to reassure the markets they would not allow the crisis to escalate. In fact domestic numbers from inside the US point to increased dollar weakness: the Fed yesterday cut forecasts for growth in the US economy, while housing data was also disappointing.
Hence it is possible the dollar spike will dissipate in the medium term.
Finally sterling has benefited from market fears about the common currency in the last day, and risen against the euro. This optimism has been reinforced this morning by announcements that third quarter GDP estimates are robust.
However there are some concerns that the UK economy is vulnerable to Irish debt, given that RBS and Lloyds TSB have exposure of £140 billion. Hence confidence in sterling is unlikely to be solidified until the markets feel the EU periphery members can become solvent, and GBPUSD exchange rates fell yesterday.
By Peter Lavelle at PureFX.co.uk