Sovereign debt worries in the Euro Zone continued to haunt financial market sentiments. Despite some positive news on support to the ailing European countries the Euro slumped 2.4% in the last week. The impact of the debt crisis on the global economy is being introspected and this has led to risk aversion across the globe. Demand for higher-yielding and riskier investment assets has generally declined as investors have become cautioned. During the week the Euro received some support after China's foreign-exchange regulator affirmed its commitment to investing in Europe. This led to hopes of improvement in the current economic scenario of the Euro Zone. But soon the optimism faded as the long-term impact of the $1 trillion bailout package coupled with slowdown in economic growth in the European region also came under scanner.
The Euro is headed for the sixth monthly loss against the dollar. Concerns that the European measures to lower fiscal deficits and contain the region's sovereign debt crisis may undermine global recovery and have led to reduced appeal of the Euro. A major factor that is weighing on the Euro is the lack of coordination between its members and markets are also losing confidence in the Euro Zone leaders. On a year-to-date basis, the Euro has slumped 8% on concern that rising government budget deficits will lead to defaults and an eventual break up of the Euro region. On the back of these worries in the Euro Zone, the US Dollar Index has gained sharply as risk aversion has led to increased demand for the low-yielding dollar.
Spain loses AAA Rating on debt burden
The latest negative development that could lead to further losses in the Euro is that Spain has lost its AAA credit rating at Fitch as Europe continues to battle with its debt crisis. The European policymakers have crafted a $1 trillion rescue package for the region's weakest economies but this has not been successful in lifting sentiments. Fitch Ratings has downgraded Spain's AAA rating to AA+ and has assigned the country a stable outlook.
This downgrade in rating has come at a time when Spain is trying to cut the euro region's third-largest budget deficit as the economy is witnessing a collapse of a debt-fueled construction boom. The unemployment scenario in Spain is very discouraging as it is running at 20% and the country's once booming housing market is also suffering a slump.
Economic situation in the Euro Zone remains bleak as debt affected countries have adopted austerity measures. But the country faces challenges in implementing austerity measures. Spain has also agreed to deeper spending cuts that would help to slash the deficit to 6% of Gross Domestic Product in 2011 from 11.2% in the last year. But a cut in public wages and pensions in Spain has failed to convince markets that the country can put finances back in order with the current high borrowing costs. These ongoing worries in the Euro Zone could continue to put downside pressure on the Euro. Even if global policymakers step up efforts in order to save the crisis from spreading further, we expect risk aversion in the financial markets to remain as investors remain cautious.
Continuing worries in the Euro Zone and recent downgrade of ratings in Spain is expected to have a negative impact on the Euro. The currency will also take cues from the economic data announcements in the coming week. The most important being the European Central Bank President Trichet's speech on Monday. Financial markets await to hear the ECB President's view on the current scenario and measures that the central bank will take in order to prevent further worsening of the situation. We expect the Euro to trade with a negative bias in the coming week as ongoing economic worries will affect investor sentiment and the appeal of the currency is reduced further on account of downgrade of credit ratings of Spain.
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