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Hope against hope for Spain bailout aids euro

Following a fortnight in which the common currency fell against its pound and US dollar, its back up again this week, as the markets hope against hope that Spain requests a bailout.


Welcome to my latest account of changes in the euro exchange rate, covering the 28th September to 5th October 2012. This is intended as a brief guide to movements in the euro this week, to put you in the best position for when you exchange currencies.

Latest changes in the exchange rate

GBPEUR: 1.2577 to 1.2439 (-1.097%)
GBPUSD: 1.6267 to 1.6181 (-0.529%)
EURUSD: 1.2933 to 1.301 (+0.595%)

Back up for the euro then! Following a fortnight in which the common currency fell against its pound and US dollar, its back up again this week, as the markets hope against hope that Spain requests a bailout.

Curiously however, this hope flies even in the face of remarks from Spanish prime minister Mariano Rajoy, who this week said the markets shouldn’t expect a rescue.

Speaking to journalists, the enigmatic Galician said “If a news agency reports that we’ll ask for aid this weekend, there can only be two explanations: that the agency is right, and knows more than I do, which is possible, or that they are not right.”

Nonetheless, arguably the reason the euro gained in spite of these remarks is that, though Mr. Rajoy can prevaricate all he likes, the fundamentals of the Spanish economy suggest a bailout is coming sooner or later.

What affected the exchange rate this week

The European Central Bank piles pressure on Spain

So the euro gained, chiefly because the markets think a Spanish bailout is coming, regardless of what Spain’s leadership argues. On top of this, comments from European Central Bank president Mario Draghi also piled pressure on Spain this week.

Speaking at his monthly press conference, the Italian central banker said: “Today we are ready with our OMT. Now it’s really in the hands of governments.” This was seen as an expression of impatience on Mr. Draghi’s part, that Mariano Rajoy keeps putting the rescue off.

Furthermore, Mr. Draghi even suggested that the austerity thought to accompany a rescue, which the Spanish government fears, needn’t be forthcoming. Mr. Draghi said “Conditions don’t need to be necessarily punitive.” This could be seen as encouraging Spain.

Hence, that too suggests that a Spanish bailout is a question of when and not if, reducing the weight of Mr. Rajoy’s denials. That accounts for the climbing euro this week.

What’s going to affect the euro next week

Of course, if you plan to transfer money to Spain, a strengthening euro isn’t what you want, because it means your pounds or US dollars don’t go as far! So is there anything that might see the euro fall?

Well, it’s possible Spain’s 2013 budget could soon be the common currency’s undoing. Madrid made its plans based on an estimated –0.5% decline in growth next year. Yet the Bank of Spain’s own governor, Luis Maria Linde, calls this “certainly optimistic,” and points to international forecasts of a –1.5% decline.

If Spain misses its deficit targets because of this, or is forced to pile on yet more spending cuts and tax increases, the markets could lose faith. That would cause the euro to decline.

Find out more: I do hope you’ve enjoyed reading this update. To find how what I’ve talked about here will affect your euro transfers, fill in your details into the form below. I’d be delighted to answer any questions you may have.

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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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