The US dollar took centre stage yesterday, retreated against its major rivals after Moody´s Investors Service placed the US government’s Aaa bond rating on review for possible downgrade due to a risk of a short-lived default. Moody’s had warned last month that it would place the US rating on review for a downgrade if no substantial progress in negotiations to raise the debt limit was made.
The dollar index, which measures the US currency against a basket of six others, fell to 74.881 from 75.213 the previous session. The dollar had already been pressured by comments from the US Federal Reserve that further stimulus would be introduced if the economy weakens.
The pound had a mixed day, gaining ground against the US dollar but falling against the euro after data showed a sharp increase in the number of people claiming unemployment benefit in the UK, stoking concern about the recovery. Howard Archer, chief UK and European economist at the analysis group IHS Global Insight, said the “underlying tone of the latest jobs data is weaker” and pointed out that the 26,000 fall in the number of unemployed people in the three months to May compared to an 88,000 drop in the three months to April.
“With the economy going through a very soft patch, the growth outlook muted and increasing job cuts on the way in the public sector, we strongly suspect that unemployment is headed up over the coming months,” he said.
However, the sovereign debt crisis afflicting the euro zone periphery continues to rumble on with debt ratings agency Fitch lowered the rating that it assigns to Greece´s long-term debt by three levels to CCC, the lowest grade for any country in the world as Fitch followed its rivals and said that a default is a “real possibility.”
The European Union’s emergency summit to be held on 11 July may shed some light on the details of the Eurogroup’s initial proposals, possibly including elements critical to address the contagion risks according to a research note published by Barclays Capital Research yesterday. The brokerage’s analysts said the European Financial Stability Facility (EFSF), a special purpose vehicle designed as a bailout fund, could be endowed with further lending resources and the ability to purchase government bonds in the secondary market. The analysts arrived at this conclusion following the Eurogroup’s statement which confirmed that more flexibility should be provided to the capacity and scope of the EFSF.
In the past few days, fears that the problems that have beset Greece, Ireland and Portugal may have spread to Italy and Spain, respectively the third and fourth biggest economies in the euro zone have pressurized the euro.
The Italian senate is set to vote on a tough austerity budget, which proposes cuts of €48 billion euro’s over the next three years in a move aimed at reducing one of the largest budget deficits in the euro zone and avoid any need for a bail-out. Correspondents say the budget is likely to be approved by the upper house, and then in the lower house on Friday. The vote has been bought forward from August in a move designed to reassure the markets and dampen speculation.
Italian PM Silvio Berlusconi has said Italy is on the front line of the euro zone’s economic difficulties. Earlier this week, the International Monetary Fund (IMF) asked Italy to ensure “decisive implementation” of spending cuts. In a report, the IMF said Italy must make efforts to reduce public debt, maintain the stability of its financial sector and introduce structural reforms to boost growth.
Commentary by Tony Redondo
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