The market unease concerning the euro came to a (temporary?) halt this morning following the Irish government’s announcement of the details of its €85 billion bailout package.
Investors commenting in newspapers noted that the package is austere: Ireland has effectively surrendered control of its economy to the EU and must pay a reported 8.5% interest rate on the bailout. However investors also noted that the package could conceivably help the Irish onto their feet in the long run.
In addition the German Chancellor Angela Merkel has moderated her comments about potential bondholder haircuts. This has reassured investors that Ireland and EU banks remain a feasible investment for the present. However a question mark remains: the EU Commissioner for Economic Affairs Olli Rehn has refused to rule out ‘collective action’ clauses for bonds in the future.
For now though the euro has stabilised.
In the near future attention in the euro zone must inevitably turn to Portugal and Spain. These nations face solvency problems similar to the Irish: for instance Spain like Ireland is suffering the after-effects of a burst housing bubble.
However the Irish bailout has set a precedent for EU response. EU officials and figures inside the French and German governments seem adamant that the euro project cannot fail. Hence it is likely that in the event of a Portuguese request for assistance the EU-IMF will support them.
This might reassure the markets in the event that more bailouts become necessary.
In the UK meanwhile the strong link between sterling and the euro means the British currency has suffered slightly during the euro zone crisis. This is because the markets have avoided risk throughout the Irish negotiations and treated the dollar as a safe haven currency. Hence at the moment sterling is relatively weak against the dollar.
This trend might continue into the near future. This morning the latest UK mortgage approval figures are released, and are expected to be disappointing. This indicates that high street banks remain unwilling to lend credit to consumers, and points to less than stellar growth in the UK economy.
In addition sterling might continue falling against the dollar because of increased optimism in the US this week.
In the short term the dollar has benefited from reduced risk appetite on the exchange market. However the Fed’s second program of quantitative easing is expected to begin yielding benefits in the US soon: the Fed is set to buy back $39 billion in assets this week for instance.
Hence the dollar could remain strong against sterling and the euro.
On the agenda this week? The situation in the euro zone might continue to dominate headlines, especially as attention turns to Portugal and other EU periphery nations. In addition tomorrow the latest EU consumer price index figures are released. If these numbers are strong – indicating that prices are high – the euro could experience a bounce.
In the US meanwhile the newest unemployment figure are released on Friday. These are expected to show that unemployment is dropping for the first time in six months, and could have a large impact on sentiment toward the dollar.
By Peter Lavelle with currency exchange specialist PureFX.co.uk.