The euro remains under downward pressure versus other majors, falling to just below the $1.31 level against the dollar yesterday afternoon as Moody’s voiced concerns about Spain’s credit rating. It regained some composure overnight and in early morning trading on a round of short-covering, also aided by comments from China that it backed efforts by Europe to stabilise the global markets following the debt crisis, suggesting that it may up its share of eurozone debt in its foreign reserves. Nonetheless, downside risks remain as markets continue to focus on eurozone debt markets.

The euro also fell back versus sterling and the yen yesterday, as well as a host of other currencies, including the Swiss franc, which hit fresh lifetime highs against the single currency. Indeed, given the current pressure on eurozone peripherals, the CHF is proving to be a safe haven of choice, with its relatively sound public finances, low employment and strong capital markets. Furthermore, the central bank (SNB) has more or less confirmed that it will not intervene in forex markets unless the rise in the currency becomes a deflationary problem or starts to impact on the export industry.

The health of the euro remains a critical concern. European Union leaders agreed at their latest summit to create a permanent ‘crisis-management mechanism’ when the EUR440 bn European Financial Stability Facility expires in mid-2013. But investors remain anxious that the euro still lacks the structural supports – a way to allow weak peripheral economies to tap bond markets alongside richer Eurozone nations or automatic fiscal transfers to avert future crises.

Data released yesterday by the ECB showed that it reduced its purchases of government bonds sharply last week. The central bank said it settled €603 million in bond purchases in the week through to last Friday, down from €2.667 billion a week earlier. The previous week’s buying had been the highest in four months, reflecting the level of concern in markets at that point. There is little to provide direction to markets today, though numbers worth watching include the UK’s public finance numbers for last month.

Tom Trevorrow

Senior Trader