Published On: Fri, Dec 7th, 2012

Spain Debt Sale Disappoints as Euro Drops

After reaching a seven-week peak versus the greenback, the euro retreated against the United States dollar. The drop was caused by weak retail sales out of the Eurozone and a lower-than-expected demand at the Spanish bond action. On Wednesday, the euro hit a high of $1.3127. This marked the highest level for the currency since October 18. It later dropped to a session low of $1.3061 with resistance seen at $1.3140.

Retail sales in the Eurozone for October show a decline that was much harsher than expected. Analysts had previously hoped that consumers could lead the recovery from the depression. Data indicates that this may not be possible for some time.
Spain also hosted a debt sale of 4.25 billion euros. This amount falls short of the financial target and caused renewed speculation that Spain may have to seek bailout funds from the Eurozone. As the fourth largest economy in Europe, troubles in Spain can easily spread to neighboring European states.
Over the last few days, the euro has strengthened on the back of new debt terms for Greece. The Eurozone also unlocked the latest of Greece’s debt tranches to help the Greek government fund operations until the end of the year. This new aid and changes to debt terms will help the nation avoid default and has helped improve investor confidence. Despite this development, the area still contains numerous underlying worries for strategists. Any negative data coming out of Europe could cause renewed selling of the euro. The United States debt crisis could also cause a fall in the value of Europe’s common currency.
Versus the yen, the euro was up by 0.1 percent to 107.33 yen. It reached a 7-1/2 month peak on Wednesday of 107.96. The Eurozone’s currency also advanced to a 2-1/2 month high versus the Swiss franc after news hit the markets that Swiss banks would charge fees for certain franc deposits.
ECB Expected to Meet
On Thursday, the European Central Bank will hold a meeting to determine exchange rates. Most analysts expect the ECB to keep interest rates steady. On Friday, the United States will also release labor market data that will indicate the health of the world’s largest economy.
The United States dollar gained by 0.3 percent to reach a level of 82.17 yen. The greenback advanced from 0.9260 against the Swiss franc to 0.9262. It also dropped to 99.13 Canadian cents from Tuesday’s rate of 99.28 Canadian cents. On late Tuesday night, the United Kingdom’s pound was at $1.6106. Toward the end of Wednesday’s session, the pound was trading at a rate of $1.6099 against the United States dollar.
The United States dollar advanced versus most major currencies during the trading session on Wednesday. The Institute for Supply Management produces an index that shows the health of service businesses. During the session, the Institute for Supply Management released data for November. The index rose to 54.7 last month from a reading of 54.2 in October. When the reading is above 50, it shows that the economy is experiencing an expansion. Most of the increase in the index was due to more sales and orders.
On December 11 and 12, the United States Federal Reserve Bank will meet to discuss interest rates an alternative to Operation Twist. Operation Twist is expected to end this month and the Fed might adopt new policy measures to fill the gap. Any new announcements would have a strong effect on the greenback. If the Federal Reserve starts a new bond purchasing plan, it could have a negative impact on the United States dollar and help the euro to rise.
Hong Kong Intervenes
On Wednesday, the Hong Kong monetary authority intervened in the currency markets. During the past week, the Monetary Authority has intervened with US$2.6 billion to depreciate the value of the currency. With more investors focused on Asia, the Hong Kong dollar has appreciated in the last few weeks. The Monetary Authority is intended to step in if the currency strays higher or lower than HK$7.75 to HK$7.85. Officially, the Hong Kong dollar is pegged to a rate of HK$7.80 for every one United States dollar.
Previously, Hong Kong was forced to intervene in the middle of October. This intervention was the first time since December of 2009 that the Monetary Authority had to take action. During the remainder of October, it intervened in the marketplace a total of five different times. The currency system in Hong Kong received some controversial coverage in the last few years. Some investors believe that the country has increased inflation and created bubbles due to low interest rates brought in from abroad.
Syrian Currency Under Pressure
As rebels take the battle closer to the economic center of Syria, the currency has come under increasing pressure in the last few weeks. Around the world, governments are discussing potential military intervention to solve Syria’s civil war. Since the beginning of November, the black market value for the Syrian pound has dropped by 15 percent. The rapid fall of the Syrian pound has fueled speculation that the currency could ultimately collapse. Basic goods in Syria have advanced in price as international sanctions and supply chain problems plagued the nation.
In March of last year, the pound was trading at 47 per United States dollar. As the conflict continued, the Syrian pound managed to hover around 75 for the remainder of the year. By November, it depreciated into the 80s as Syrian officials struggled to stop black market trade of the pound. Despite these efforts, the pond plunged to 90 versus the greenback during the last week.
Most governments and central banks use funds to fight depreciation during tough times. Syria will have difficulties doing this due to their falling reserve holdings. The central bank governor in Syria, Adib Mayaleh stated that the nation had only spent 10 percent or less of its reserves by September. Outside analysts have argued this statement and place their estimation at half of the reserves or less remaining.
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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.