Foreign Exchange Report : Fears That France Will Lose Its AAA Debt Rating Fuel Further Losses For Global Stock Markets, Sending GBP USD Rate Lower

11 Aug 2011 at 8 AM - Written by John Cameron

STORY LINK Foreign Exchange Report : Fears That France Will Lose Its AAA Debt Rating Fuel Further Losses For Global Stock Markets, Sending GBP USD Rate Lower

The Pound Euro exchange rate (GBP EUR) is 1.1354. The Pound Dollar exchange rate (GBP USD) is 1.6177. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5754.

Yesterday saw the re-emergence of Eurozone debt fears, causing renewed uncertainty in global equities and currency markets.

Worries over Eurozone sovereign debts, which were initially limited to peripheral European states, now look to be spreading to major economies, with investors growing increasingly concerned about France’s finances during yesterday’s session. These fears were fuelled by market rumours that leading credit ratings agencies were set to downgrade France’s current AAA debt rating.

Investors’ concerns over the possible spread of debt contagion to France were not limited to government debt. France’s retail banking sector, which is heavily exposed to Greek and Italian debt, also came under scrutiny yesterday. Leading French lender Societe Generale was singled out for particular attention, with its shares trading down by over 20% at one point during yesterday’s session. The UK’s banking sector shares also came under heavy selling pressure on the day.

Yesterday’s downward move in global risk appetite caused further downside for equities markets across the world, with London‘s FTSE 100 closing down by 3.05% and France‘s CAC index falling by almost 5.5%. US stock indices mirrored these losses, while Asian shares are currently trading slightly down on the session.

Increased risk aversion caused the high-yielding currencies to give up some of Tuesday’s gains, with the GBP AUD rate trading as high as 1.5955 overnight, before dropping back.

With Switzerland’s central bank announcing yesterday that it was following the Bank of Japan’s lead in stepping into the currency markets to actively weaken its currency, the Franc came under heavy selling pressure yesterday, with the GBP CHF rate trading almost 5c higher than Tuesday’s low. With support for he Franc and the Yen currently on the wane, the US Dollar has been left to pick up safe haven support, causing the GBP USD rate to trade down to a 3 week low of 1.6111 overnight.

Meanwhile, with the authorities bringing social unrest in major UK cities under control overnight, investors’ focus has returned to Britain’s real economy, which is not good news for the Pound. The Bank of England used yesterday’s Quarterly Inflation Report to downgrade its 2011 growth forecast for the UK economy from 1.8% to 1.5%, observing that, "headwinds are growing stronger by the day". The report, coupled with Tuesday’s weak UK trade and manufacturing sector data, may cause Sterling to come under further selling pressure before the end of this week’s session.


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