Euro recovers as debt concerns ease

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The euro recovered from early losses on Tuesday as Spain and Ireland raised funds in the debt markets, easing some concerns over the financial health of countries on the periphery of the eurozone.

Sentiment towards the euro was knocked late on Monday after rating agency Moody’s downgraded Greek government debt to junk status.

The euro continued to come under pressure early in yesterday’s session after the Zew survey of German investor sentiment slumped in June. The index dropped to 28.7 from 45.8 in May, well below consensus forecasts for a fall to 42.

But the euro recovered after government bond auctions in Spain and Ireland received support.

Although both countries had to pay elevated interest rates, the fact that they did not fail to attract investors was met with relief on the currency markets.

“While there remains a good deal of public scepticism towards eurozone peripheral countries and their ability to manage their debt burden, the recent reality is that they have been able to tap private capital markets,” said David Bloom, of HSBC.

“This should, and seemingly has, relieved some downward pressure on the euro.”

The euro rose 0.8 per cent to $1.2345 against the dollar, its highest point in June, and climbed 0.8 per cent to Y112.84 against the yen. The euro also gained against the pound, rising 0.5 per cent to £0.8332, after UK inflation data came in weaker than expected.

Figures showed that UK consumer price inflation rose 3.4 per cent in May, down from 3.7 per cent in April and lower than consensus forecasts for a 3.5 per cent rise.

The data eased concerns that the Bank of England might have to exit from its ultra-loose monetary stance sooner than expected to fight rising price pressure in the economy.

Jonathan Loynes, of Capital Economics, said the figures helped to ease concerns about the outlook for inflation.

“Inflation worries are not about to disappear overnight,” he said.

“But there is some reassurance here that the Bank of England will be able to avoid the nightmare scenario of having to raise interest rates alongside the huge fiscal squeeze.”

The pound gained 0.6 per cent to $1.4816 against the dollar, however, as easing concerns over eurozone sovereign debt boosted risk appetite and weighed on haven demand for the US currency.

Elsewhere, the dollar fell 0.2 per cent to Y91.40 against the yen, fell 0.4 per cent to SFr1.1320 against the Swiss franc and dropped 0.9 per cent to C$1.0251 against the Canadian dollar.

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