The following article is taken from Eye on Spain, www.eyeonspain.com

Financial And Currency Overview - 2012

Nothing seems to be making much of a difference in the currency markets at the moment. In itself that is a contradictory statement to make.

Following the last couple of months of concern with Greece and the lead up to the UK budget, both matters have passed us by without having any real impact upon exchange rates. Finally after much political haggling the Eurozone Finance Ministers agreed to release the necessary funds to Greece and stop them (for the time being) from defaulting. How long this money will last is the big thorny issue and the poor Greeks are having to make all sorts of sacrifices.

The big question now is has contagion been stemmed?

Not if you listen to all the pessimists by all accounts; it's the turn of Spain and Italy next. It is true, however, that both governments are experiencing some hiccups within their own countries. In Spain we know that they will not achieve the budget set by them for 2012 and the recent local elections proved to be a very difficult one indeed for them with one of the biggest regions, Andalucia, almost turning against them. They did, however, manage to hold 50 seats compared to the 47 won by the PSOE. The turnaround was a protest against the recently introduced new set of austerity measures and this in a region where the regional deficit is more than double its 1.3% of Spanish GDP for 2011.

Euro CalculatorIn Italy a similar situation is looming as Mario Monti who was brought in to restore order to the country’s financial plight is facing a revolt form the unions and fellow politicians.

With rates on bond sales being a key part of any further financial stability, pressure will continue to mount on both these countries future bond sales.

The other matter for EU to deal with is the coming together of the two bailout funds, the EFSF (European Financial Stability Facility) and the ESM (European Stability Mechanism). They believe the larger the fund the more confidence the watching world will have in the EU’s ability to bail out any country without breaking the back of the fund. Germany and Finland in particular have been very much against merging these two funds, however, it does seem Angela Merkel is yielding to the pressure to achieve such but she has to balance this decision against her electorates wishes, a tricky one!!! What ministers do seem to agree on is that there is no room for complacency.

Looking at the UK there has been a mixed bag of news with bankers bonuses continuing to seek headline news and news of potential job losses through companies such as the Game Shop. Banks are never far away from the headlines and again this happens to be the case with RBS as the government considers how it should conclude its discussions with an Abu Dhabi sovereign wealth fund who wish to buy part of RBS. Is it a right time to sell particularly as the taxpayer will face a bigger loss than that already costed. You can flip a coin on this one and still not win.

With mortgage applications also proving to be elusive the fragility of the UK economy once again raises its head. Let’s hope that Lord Browne (former head of BP) is correct when he forecasts that the UK could benefit by up to 50000 jobs with the possibility of shale gas fracking doubling the reserves of gas in the UK.

Whilst over in the States all had been going particularly well until Ben Bernanke Federal Reserve Chairman cast some doubt over whether the sharp decline in US unemployed figures could be sustained without the demand increasing across the bigger picture, unusually he was a mlittle downbeat.

If you look at what has been happening with rising inflation and an improving job market, the possibility of further quantitative easing is becoming a little more distant. His comments did however have a temporary impact upon the exchange rates as the dollar did retreat a little against the pound and the euro.

So what about exchange rates? The ranges have been pretty short and are

 

£ to $: 1.573 to 1.596

 

£ to €: 1.187 to 1.203

 

€ to $: 1.317 to 1.337

 


Comments:

CommentDateUser
My interpretation of all the tight exchange rate bands is that there is a lot of protection of the € so that if it looks like if it's weakening some of the major countries are stepping in to buy €'s to keep it stable. Similarly if it appears to be getting too strong, thus weakening eurozone countries export potential, they're stepping in and selling €'s to keep it stable. This creates an abnormal and stable market, but doesn't reflect the true economic global situation.4/1/2012 8:59:00 AMDuncan f. Bover
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