10.20.11

Consequences of the Concerns Related to Europe

As the situation in the European Union continues to be tensed, the trading market has a powerful reaction as the risk aversion has triggered a new wave of changes on the market. The safe-havens seem to be favored and the currencies around the world gain based on different speculations related to the evolution of the sovereign debt crisis.

The Euro has managed to regain a little of yesterday’s losses today on the speculation that the policy makers are to increase the rescue fund. The Guardian announced that Germany and France agreed to increase the European Financial Stability Facility from the level of €440 billion ($607 billion) to the one €2 trillion. This change is supposed to take place before the G-20 summit which is to take place this weekend. The Stoxx Europe 600 Index grew by 0.8 percent.

Moody’s has announced the downgrade of another credit rating, that of Spain. This has generated a wave of risk aversion which has directed traders towards safe assets such as the Japanese Yen, which managed to gain against most of its major counterparts today. The credit rating of Spane has been downgraded from A1 to Aa2 and the outlook stayed negative. The agency explained its decision by stating the fact that Spain is deeply affected by the financial instability which is specific to the Eurozone at the moment. Also, the Eurostat report concerning consumer confidence which is to be released today is expected to show a decrease from -19, registered in September, to -20 for the month of October, which would be the lowest level registered since the month of August, 2009.

This risk aversion has had a negative effect upon the US Dollar, which has started to lose ground even against the Japanese Yen. Although traders are confronted with a sentiment of risk aversion, they seem to remain optimistic on a long term basis and this is why they are headed towards higher yielding currencies. Even though the US Dollar is confronted with some problems at the moment, there is a great possibility that the currency is to make a reversal in the near future. The US Dollar will especially gain if the European leaders will not take any decision this time. If the situation in Europe is going to get worse, the US Dollar will totally benefit on this behalf.

The Australian Dollar managed to gain on the same factors, along with the fact that China continues to show economic growth, although we are not speaking about considerable figures. On the other hand, the Australian Dollar may lose in value due to the speculations related to a rate cut from the RBA. If the interest rates are going to be reduced, the Australian Dollar is going to decrease against its major counterparts, especially as the slow rhythm of growth of the economic situation in China is expected to maintain low values for a while. Along with the risk aversion, the Aussie may be affected by these factors.

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