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US dollar triumphs as Eurozone bank recapitalisation agreement unravels

The US dollar has triumphed against the pound and euro this week, as a Eurozone agreement dating back to June to break the link between indebted banks and governments unravels.


Welcome to the Pure FX account of changes in the euro exchange rate, covering the 5th to 12th of 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 exchange rate changes

Pound to euro: 1.2439 to 1.2398 (-0.33%)
Pound to US dollar: 1.6181 to 1.6038 (-0.884%)
Euro to US dollar: 1.301 to 1.2936 (-0.569%)

The US dollar has triumphed against the pound and euro this week, as a Eurozone agreement dating back to June to break the link between indebted banks and governments unravels. If you’re in the US and intend to emigrate to Spain or Portugal then, this means you can receive a better euro exchange rate this week.

What’s affected the exchange rate this week

Chief among the reasons for the US dollar’s gains this week is the breakdown of a crucial agreement between Eurozone governments.

Back in June, Eurozone heads of state agreed to let the newly launched European Stability Mechanism (the rescue fund) directly recapitalise troubled banks, rather than forcing sovereigns to accept the loan first. This was seen as vital to break the link between banks and governments, whereby they became increasingly entangled in each other’s debts.

Yet a fortnight ago, the finance ministers of Germany, Finland and the Netherlands reneged on this agreement, saying that only future bank liabilities can be paid for with the ESM, and that existing banking problems count as “legacies” that governments must pay for themselves.

Understandably, this wsa met with some discomfort in the governments of Ireland, Italy, and Spain especially, which had been counting on the ESM to break the toxic link between themselves and their banks. Indeed, they’ve not accepted this change of heart lying down, with Italian prime minister Mario Monti saying this week “the ESM should be rapidly given the possibility to recapitalise banks directly.”

Who wins this fight is yet to be seen. However, for the moment, market confidence in the ability of Europe’s leader to solve their problems has taken yet another knock, accounting for the falling euro, and the rising greenback as an alternative.

What’s going to affect the exchange rates next

What happens regarding the use of the ESM will likely be decided next week, when the heads of state of the European Union convene for a summit.

If the result is favourable to Ireland, Spain, and other indebted countries, the markets will likely receive the news with some cheer. Resistance on the part of Germany though, will be seen as the Eurozone once again dragging its feet, with the high chance of the euro continuing to lose out. That though will benefit you if you plan to buy the common currency.

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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