Week of market volatility ahead for main global currencies

by Ray Clancy on November 29, 2010

Volatility ahead for global currencies

Expats around the world can look forward to a week of continued currency volatility as the Eurozone debt crisis and the risk of war in the Korean peninsula combine to darken market sentiment, according to analysts.

Markets initially cheered news that Ireland had finally agreed to surrender sovereignty and accept emergency aid from both the European Union and the International Monetary Fund in a move that was expected to calm European bond markets.

However, the Irish government crumbled as they attempted to pass another emergency budget in order to meet agreed criteria before receiving any bailout money. The situation remains far from resolved and the threat of Portugal and Spain being dragged into the storm increased rapidly, analysts from Travelex Global Business Payments point out.

Adding further weight behind risk aversion was the firing between North and South Korean troops which threatened to spark all out war. ‘Negative geopolitical tensions naturally sent investors fleeing for shelter as equity markets fell. The safe haven US dollar, Japanese yen, Swiss franc and Gold were the chief beneficiaries with all three of the before mentioned currencies, plus the British pound, reaching two month highs against the under fire euro,’ they say in a report.

While sterling has both benefited and suffered as a result of broader market developments, UK banks’ exposure to Irish debt was again highlighted and safe haven flows resulted in the pound dipping to a one month low against the US dollar.

According to the report CIPS service, manufacturing and construction sector indices are the highlights that will give markets further clues on the health of the UK economy in the coming week. ‘Investors are still unconvinced that the UK economic recovery is on solid footing with the governments austerity push likely to significantly test its resolve,’ they say.

The Euro’s trade weighted index, which gives a truer reflection of its performance against rivals, fell to a nine month low as sovereign debt concerns accelerated. Lingering uncertainty hurt Portugal and Spain as peripheral bond yields continued to rise with investors growing increasingly nervous over the possibility of other nations joining Ireland on the treatment table.

Indeed, the very resolve of the single currency was called into question last week which prompted a stern response from the head of Germany’s Bundesbank, Axel Weber, who said that ‘an attack on the euro has no chance of succeeding’.

This coming week inflation and unemployment figures could have an impact but the focus will be on the European Central Bank’s monetary policy meeting on Thursday. Interest rates are expected to remain unchanged at 1% but markets will look for signs that the ECB will again have to extend their cheap loans facility as European financial markets deteriorate. ‘It goes without saying that investors will continue eyeing bond market developments and, if Irish economic problems do spill over to Portugal, then the euro will come under another round of broad selling pressure,’ the report points out.

The Thanksgiving holiday in the US meant that it should have been a quiet week for the dollar. However, more volatile moves helped the greenback achieve new record highs. There was also some encouraging data that suggested that the US recovery might stabilize after consumer spending rose for the fifth consecutive month and jobless claims fell to a two-year low.

In Japan there was more bad news after Japan’s justice minister resigned over budget issues and the government continued to grapple with sky-high debt levels. Export data was disappointing after falling considerably short of expectations. However, the yen found support from risk aversion, particularly from tensions in the Korean peninsula although the Japanese currency failed to keep pace with the rising US dollar and fell to almost a two month low.

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