Foreign Exchange: US Dollar Safe Haven

With tension between North and South Korea the Pound fell below $1.59 against the US Dollar yesterday it though pushed 1.18 against the Euro.

Foreign ExchangeWith reports of the escalated tension between North and South Korea and the exchange of artillery fire, the US Dollar rallied against the Pound and the Euro as investors sought safe havens.

With a revival in risk aversion, lower-yielding currencies like the US Dollar and the Yen made sharp gains on the foreign exchange markets against the majority of the majors.

The Pound pushed to a high towards 1.18 against the Euro, as concern continues that the sovereign debt crisis will move focus to Portugal and Spain.

Although Ireland has sought a financial rescue package from the EU and IMF, this has done little to boost sentiment in the Euro zone or reverse the jump in borrowing costs.

Nicholas Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd, said that “investors are plumping for the safety of core government bonds at the expense of peripherals, and gilts are benefitting from that. The problems in Ireland are not the end of this situation. Investors are concerned that Portugal could be next.”

Ireland follows Greece in seeking a bailout to save its struggling banks and financial institutions.

The Pound received a boost yesterday further to a report from the Nationwide Building Society which said that while house prices will fall next year, record low interest rates will prevent the decline from matching the falls in 2008.

As far as UK economic data, the focus today is on the revised estimate of gross domestic product in the third quarter. The resilience in the UK economy shocked investors last month, as growth in the three months to September doubled initial expectations, which helped convince the Bank of England to postpone a resumption in the quantitative easing plan.


The Euro is under pressure against the majors, as Irish, Portuguese and Spanish bonds declined, while German debt also advanced.

Ireland’s debt rating was lowered by two levels from AA to A by Standard & Poor’s, with a negative outlook, as the government prepares to unveil a four-year deficit reduction plan, similar to the UK.

The downgrade risks worsening a mass exodus of investors from Irish bonds.

The Euro dropped 1.9% against the US Dollar, albeit staging a recovery by the end of trading last night.

As tomorrow is Thanksgiving, there are a host of US economic reports due today.

Market Analysis by Adam Solomon, TorFX

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