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Euro seems still not to appreciate the gravity of Greece’s rating cut


US Dollar:

The risk tolerance of investors around the globe was put to the test Tuesday with the unexpected news that Standard & Poor’s was downgrading the sovereign credit rating of both Greece and Portugal. The first concern with this event was how prolific its implications would prove. The next question was what securities were at risk and which would prove to be the best mooring to whether the potential storm. For the dollar’s place in this debacle, the severity of the global shock this event threatened was the most important factor. Assessing the situation from a global perspective, lowering Greece’s credit rating to ‘junk’ status further put the nation out of reach of reasonable assistance from the European Union and IMF. The dimmer the outlook for this particular economy, the closer they will come to default. There is considerable exposure to this particular nation’s assets in portfolios across the world; and such an event could lead to significant loss. Alone, the news about this single economy would be very concerning; but taken along with the announcement that another EU member was re¬ceiving a two-level downgrade at the same time, the danger is far more pervasive. Now the issue looks more like a structural problem for the Union that threatens to evolve into a crisis for the global economy. Under these conditions where safety is at a premium and risk must be unwound, the dollar once again shines as a safe ha¬ven. While there is an argument to be made about gold’s unique isolation from sovereign debt risk; it is the dol¬lar that exemplifies the liquidity and relative heft of the world’s largest economy.


Every piece of pound-centric event risk that crosses the wires is filtered through the uncertainty that surrounds next week’s general election. A popular opinion poll cast by ComRes Ltd yesterday has shown sup-port for Conservatives at 32 percent, Liberal Democrats at 31 percent and Labour at 28 percent. If this is how things settle, it would mark the first time in over three decades that Parliament hasn’t seen a majority. While this may be good for debate, it impedes pushing through necessary legislation to fix the economy and/or budget deficit. With that in mind, the weak BBA mortgage reading and the unchanged reading from the CBI retail activ¬ity make the next administrations job that much tougher.



The next step in a burgeoning financial crisis has been taken. With Greece still waiting on Germany and the other European Union members to agree on specific loan conditions to release the 45 billion euros that the region pledged along with the IMF, the nation has found itself in an even deeper hole with the Standard & Poor’s rating agency lowering its sovereign rating to junk status (BBB+). It would have been difficult enough for Greece to have balanced an inevitable economic recession along with its austerity cuts; but accomplishing this at financing costs that junk bonds command is highly improbable. What’s worse, this rapid implosion is starting to pull other EU members down as well. Portugal’s own rating was cut two levels from A+ to A- suggesting this country’s own troubles cannot simply be glossed over with the help of a robust market. Popular opinion amongst the citizens in both countries is further an issue. A pool from Greek Public Opinion reports that 60.9 percent of Greeks oppose a bailout from the EU and IMF. In Portugal, strikes are gaining pace against planned austerity cuts. Ireland and Spain have also come under scrutiny given credit default swap premiums. With each week, this looks less like a Greek problem and more like a euro problem.


Oil prices extended losses in Asia overnight as the US dollar strengthened amid concerns about a euro zone debt crisis after Greece's debt rating was downgraded.

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GBP/USD 1.5249
GBP/EUR 1.1553
EUR/USD 1.3197
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