Foreign Exchange Rates : EUR Suffers on Moodys Warnings, GBP USD poised to make further gains

July 28, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Rates : EUR Suffers on Moodys Warnings, GBP USD poised to make further gains

The Pound Euro exchange rate (GBP EUR) is 1.1365. The Pound Dollar exchange rate (GBP USD) is 1.6353. The Pound Australlian Dollar exchange rate (GBP AUD) is 1.4776. The Pound Yen exchange rate (GBP JPY) is 127.0170

Earlier in the week we considered the likelihood of a US Debt default, the general consensus in the market was that after ongoing discussions a solution would be met and the debt ceiling would be raised. The process of raising this limit must be passed by congress and has actually happened 11 times in the past 10 years without much concern. US Debt has always been considered one of the safest types of global debt for this reason yet now looks far more concerning.

The US Treasury has a constitutional right to issue bonds to raise funds to fund government expenditure. The problem is congress mandates the debt ceiling at any point in time and must agree if the limit is to be extended. It seems with the current deadlock that Congress could now let the solvency deadline pass with potentially disastrous consequences.

If the Treasury defaults we can expect to see serious ramifications, the primary concern would be global debt contagion. US Debt has previously been considered a risk free asset and has therefore always been considered as the benchmark risk free rate. Alternate risker asset classes are compared to this benchmark rate when investors consider risk to reward ratios. If the so called safest asset class defaults we would expect to see some serious risk aversion and a subsequent sell off in financial risk.

The effects on the currency markets would be substantial, safe haven currencies such as the Swiss Franc would rally further inline with safe haven commodities such as Gold. Riskier antipodean currencies such as the AUD could weaken as traders wind in carry trades.

Euro Zone sovereign debt fears returned to the spot light yesterday afternoon. Moody's rating agency warned that a second Greek bailout could set a precedent in the EMU for credit negative bailouts, whilst mounting concerns that EMU nations will struggle to reach their targeted 3% growth rates. The market reaction to the concerns expressed by Moody's was that the ECB may well now hold a neutral stance on interest rates into next year. We could therefore see a second round of Euro selling pressure moving towards the weekend.

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