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FX Day Trading - 8 August 2011
G7 "ready to take action"
ECB to buy Italian and Spanish bonds
Dollar directionless so far
Those who thought football referees had the world's most important and thankless job should consider the nigh-on impossible task faced by the credit ratings agencies.
A decade ago they bent over backwards to be nice, handing out triple-A* ratings like a GCSE examining board. After various mortgage bonds and soap coupons proved to be differently worthful the agencies were told to get tough and do their job properly.
So they have done just that, downgrading Greece, Portugal, Ireland, Cyprus and... the United States. Hang on guys that wasn't supposed to happen!
After close of play on Friday, Standard & Poor's reduced the US from AAA to AA+. After a weekend to think about it investors are still not sure what to do, other than to continue selling equities and offloading the currencies with most to lose from a global slowdown.
In Washington, Treasury Secretary Tim Geithner is more than a bit miffed. Not only has the first-ever US downgrade happened on his watch, it has screwed up his retirement plans. Because it would be bad form to desert a sinking one-term president in the autumn of his power, Mr Geithner will stay in his post until next autumn.
He expressed his exasperation at the S&P downgrade, saying it showed "a stunning lack of knowledge about basic US fiscal budget math[s]".
In the Far East FX market this morning, reaction to the downgrade has been muted. Although the US dollar spreads came under early pressure, it was by no means a one-way street. On one hand it is disconcerting that America now only has two AAA ratings (from Fitch and Moody's) but, on the other, nothing has changed at a practical level.
There is certainly no cause-and-effect link between S&P's downgrade and the US government's ability to borrow or its cost of borrowing. FX spread betting investors might, in future, be less inclined to put money into Treasury bonds and other US investments but any such change would be gradual because the alternatives are limited.
The euro is in a similar position. As long as investors dislike the dollar it is hard for them to sell euros because there is nowhere else to go. To help things along, the European Central Bank has announced that it will, if necessary, buy Italian and Spanish bonds.
This marks a major breakthrough in the battle to stem contagion in southern Euroland. The strategy is not without risk but for the ECB to do nothing could be even riskier. An emergency meeting of G7 finance ministers and central bankers endorsed the ECB decision.
Predictably, it also praised the fiscal efforts of Club Med while blaming financial markets for the "financial tensions faced by Italy and Spain".
G7 is "ready to take action to ensure stability and liquidity in financial markets" and the ECB promises to buy more bonds. Before long, spread betting investors will test that resolve.
Currency Trading and Spread Betting carry a high level of risk to your capital and you can lose more than your initial investment, they may not be suitable for all investors. Ensure you only speculate with money that you can afford to lose and that you fully understand the risks involved and seek independent financial advice where necessary.
The above content does not constitute investment advice, it is provided purely for information purposes and is delivered as a personal view of the writer. Neither the contributing company (or writer) nor Online-Spread-Betting.com accepts any responsibility for any use that may be made of the content.
'US Credit Rating Downgrade Puts US Dollar Spreads Under Pressure', Article by Moneycorp, last update: 8-Aug-11
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