The US Dollar came firmly back into the spotlight on Friday when ratings agency S&P downgraded the US credit rating. With all of the recent events it had always been a possibility that a downgrade could be on the cards, but many thought that the US would escape a downgrade after President Obama had managed to have the debt ceiling raised. As the global economy is showing signs of slowing down, investors are scrambling for safe havens which will be a concern for the Swiss Franc and the Japanese Yen.
So it looks set for “risk off” at the moment which will not be a good sign for Sterling. The Pound has had a decent run in the past few weeks, but could stand to lose out a little if risk is taken off of the table and investors plough all of their funds into safe haven currencies. We have already seen the US Dollar hit a historical low against the Swiss Franc in the past week and going forward both Switzerland and Japan will be concerned at the strength of their currencies.
The Eurozone may have had the heat taken off it briefly with the US being downgraded but there are still major concerns over the stability of both Spain and Italy. As bond yields continue to widen it looks as though the European Central Bank may step in and buy Spanish and Italian bonds to curb the widening before it gets to an uncontrollable level as it did with Greece. The outlook is still fairly negative for the single currency and I feel it is over a matter of time before one of the above needs to request a bail out.
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