The euro edged higher against the US dollar in recent trading but posted its worst weekly performance in three months versus the greenback, with the threat of euro zone sovereign downgrades keeping the common currency vulnerable to sell-offs.
Fitch Ratings warned it may downgrade France and six euro zone countries, led by Italy, Spain, and Belgium, due to lack of a comprehensive solution to the two-year old sovereign debt crisis.
The ratings firm did affirm France’s triple-A rating, with the country supported by a wealthy and diversified economy. The euro was weighed down by news that Germany’s Angela Merkel has rejected any suggestion of raising the funding limit of Europe’s future bailout fund, the European Stability Mechanism (ESM),
The ESM, which will replace the current EFSF bailout fund and should come into effect from the middle of next year, will have an effective lending capacity of 500 billion euros. Having said that, that did not stop the euro dropping to an 11-month low around $1.2945 versus the dollar. Note that you can speculate on forex futures with firms like Spread Co and IG Index.
The Federal Reserve on Tuesday warned that turmoil in Europe presents a big risk to the US economy, leaving the door open to possible further steps to boost growth even though it noted a somewhat stronger labour market.
The central bank said the US economy was “expanding moderately” despite an apparent slowing in the world economy. But while there had been “some” improvement in the job market, unemployment remained elevated and housing depressed, it said.
Some investors had speculated that the Fed might show more urgency about moving ahead with new measures to help the economy. The Fed’s statement was little changed from the one made after its last meeting in early November, although the US central bank pinned uncertainty for the US economy more squarely on events in Europe.
Most economists have said the Fed’s next meeting on January 24-25 would be the more likely occasion for any new moves to add to the US central bank’s already extraordinary push to bring down borrowing costs and help growth.
This new US economic data, which includes housing starts, personal income and spending, as well as durable goods orders, could add more optimism about the improving US economy in the year’s waning days, analysts said. That would spur a rally in risky trades and a sell-off in the safe-haven dollar.
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