The dollar has strengthened against its major European rivals on Friday, but has added to its recent weakness against the Japanese Yen. Risk appetite among investors was down today, due to the current situation in Spain. The yield on a 10-year Spanish government bond climbed above the 7 percent level today.
The Spanish government cut its economic forecast on Friday and sees the recession extending into next year as it adopts more austerity measures. The government now expects the economy to shrink 0.5 percent in 2013, in contrast to its earlier forecast for a growth of 0.2 percent. The economy is expected contract 1.5 percent this year, slightly less than the 1.7 percent decline predicted earlier.
Eurozone finance ministers gave their final nod of approval for a EUR 100 billion bailout deal for troubled Spanish banks on Friday. The agreement to backstop the Spanish banking sector was unanimous among the 17 members of the eurozone.
The bailout will provide funding up to EUR 100 billion for the recapitalization of Spanish banks, as agreed last month. In the beginning, EUR 30 billion will be set aside for use in case of ‘urgent unexpected financing needs’, the Eurogroup said in a statement after a conference call. The first tranche is likely to be made available by the end of this month.
“Ministers concur with the assessment of the Commission, in liaison with the ECB, the EBA and the IMF, that providing a loan to Spain for the purpose of the recapitalization of financial institutions is warranted to safeguard financial stability in the euro area as a whole,” the statement read.
Fitch Ratings on Thursday affirmed Italy’s credit rating at ‘A-‘ with a ‘negative’ outlook, citing recent and prospective structural reforms that would enhance the growth potential of the economy.
The dollar broke out of a 3-day trading range between about $1.2320 and $1.2220 versus the Euro on Friday and set over a 2-year high of $1.2143.
Germany’s producer price inflation eased more-than-expected in June to its lowest level in two years, the Federal Statistical Office said Friday. The producer price index rose 1.6 percent year-on-year in June, marking the lowest rate of inflation since May 2010, when it stood at 0.9 percent. The figure slowed for the third month in a row. Economists had expected the rate to slow to 1.8 percent from May’s 2.1 percent.
The French leading economic index fell 0.2 percent each in May and April after rising 0.4 percent in March, the Conference Board reported Friday. Data showed that only two of the seven components of the leading economic index increased in May. During the six-month span through May, the index increased 0.9 percent.
The U.K. government should not accelerate its fiscal consolidation if growth fails to gather momentum despite further monetary and credit easing, the International Monetary Fund said in a review report on Thursday. “Persistent weak growth that hinders achievement of fiscal targets might also pose risks to credibility,” the Fund observed.
Under current fiscal plans, the pace of consolidation is expected to accelerate next year to around 1.5 percent of GDP. However, the government plans to ease the pace of fiscal consolidation to 0.5 percent of GDP in fiscal 2012-13, due to substantial downward revisions to potential GDP.
“Any adjustment to the path of consolidation should be in the context of a multi-year plan and ideally accompanied by deeper long-run entitlement reform to help preserve credibility,” the Directors of the IMF mission to the UK said.
The buck bounced back from Thursday’s 1-month low of $1.5736 on Friday and climbed to a 2-day high of $1.5616.
The U.K. public deficit widened in June raising concern about the ability of the government to bring down its shortfall to the target as the economy is struggling to avoid sinking deeper into a double-dip recession.
Public sector net borrowing (PSNB) excluding the temporary effects of financial interventions rose to GBP 14.45 billion from GBP 13.92 billion during the same month last year, the Office for National Statistics reported Friday.
The greenback has been weakening in comparison to the Japanese Yen for the past 2 weeks. The downward trend has brought the U.S. currency from Y80.085 down to around the Y78.500 level.