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Spain’s reluctance to request aid weighs on the euro

The European Central Bank has a plan to cut Spain’s borrowing costs. But with so many strings attached, Spain isn’t sure it wants it. That’s putting pressure on the euro.


Welcome to my weekly account of what’s affected the euro exchange rate, covering the 3rd to 10th August 2012. This is intended as a brief guide to the latest movements in the euro, to help you plan the best time for you to change currencies.

How The Rates Have Changed

Pound to euro: 1.2615 to 1.2707 (+0.729%)
US dollar to euro: 0.8079 to 0.8151 (+0.891%)

What’s affected rates this week

The euro has fallen against both the pound and US dollar this week, chiefly because of a figurative game of chicken between Spain and the European Central Bank.

The ECB said this week it was prepared to directly intervene in the financial markets to reduce Spain’s borrowing costs. Given that these are +7.0%, this is something Spain badly needs, to reduce international pressure and return to growth. Yet the central bank will only do so if Spain requests aid from the Eurozone rescue fund.

Now, that would be a huge political blow to Spain’s leader Mariano Rajoy. It would involve the IMF taking control of Spain finances, and amount to a personal humiliation. Hence, though it may be in the best interests of Spain to request the funds, Rajoy has yet to do so. Hence the uncertainty about Spain’s future, and the declining euro.

What this means for you

As ever, the eurozone’s loss is your gain. If the euro is weaker against the pound and US dollar, that means emigrants to Spain and Portugal can obtain more euros when they go.

Indeed, right now the US dollar is close to its highest level against the euro since July 2010, meaning this is the best opportunity to buy euros in two years. It’s also a similar story with the pound, which is close to its highest point against the euro since 2008, and the financial crisis.

Where the rates are going next

Though no one can guarantee how the exchange rates will change, it looks like there’s a good chance the euro will continue to weaken in the coming weeks.

This is because the pressure on both Spain and the wider Eurozone is set to increase. For instance, when asked by Reuters if there was a chance of Spain deposing Mr. Rajoy, a senior member of his People’s Party said, “in the current context, anything is possible.”

And as Matteo Cominetta, a European economist at UBS, notes, with Spain’s borrowing costs still climbing, “The road is getting narrower and narrower and in the end will have to ask for an intervention.”

In other words, the situation in Europe is going to get worse before it gets better in the short term. That though will mean the euro continues to weaken against its main counterparts.

Get in touch: If you have any questions about the euro exchange rate, or about transferring money to Spain and Portugal, get in touch by leaving a response in the box below. I’d be delighted to provide an in-depth response to your query.

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Peter Lavelle is an economist at foreign exchange broker Pure FX. For a free no-obligation quote regarding changing currencies, get in touch at foreign exchange specialist Pure FX.

Copyright: Peter Lavelle, Pure FX
Category: Expats
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