So far this week the Euro has declined by almost two cents against the US Dollar due to fresh concerns regarding the stability of the 17-nation bloc. The Euro to US Dollar exchange rate (EUR/USD) shrunk from a highpoint of 1.3048 on Monday morning to low of 1.2848 yesterday afternoon, as investors began to fear that deteriorating confidence could lead to a bout of Eurozone bank runs.
The Pound to Euro exchange rate has also improved by around a cent since Monday morning, with GBP/EUR hitting a 6-week high of 1.1822 on Monday evening.
Yesterday Fitch added to Cyprus’ worries by downgrading its two largest banks and putting its sovereign debt rating on negative credit watch.
Fitch cut the Bank of Cyprus – the so-called ‘good bank’ – one notch from B to Restricted Default, citing: “losses imposed on senior creditors” as part of the restructuring measures that were forced upon the bank by the troika – the group of officials from the Eurozone, European Central Bank, and International Monetary Fund.
Laiki, also known as Cyprus Popular Bank – but now referred to as the ‘bad bank’ on account of the fact that it facing closure – was downgraded from B to Default. The decision from Fitch was a bit of a no-brainer as all healthy assets and insured deposits are set to be transferred to the Bank of Cyprus, whilst the remaining toxic assets will stay at Laiki, before the so-called ‘bad bank’ is dissolved over time.
Hellenic Bank – Cyprus’ third biggest bank – dodged a downgrade, but was put on “rating watch negative” by Fitch and could be subject to a downward revision in the future.
Fitch placed the Cyprus sovereign credit rating on negative outlook, with a potential downgrade in mind following the recent bailout package. Fitch currently rates Cyprus as B, five steps into junk territory.
“The rating watch negative reflects Fitch’s opinion that the shock resulting from the systemic failure of Cyprus’ banking system will have profound negative implications for the domestic economy, which heightens the risk to public finances”.
Although the Euro exchange rate did not suffer a dramatic decline in the wake of Fitch’s announcement, the potential still exists for further losses as investors continue to reflect on the potential threat of mass withdrawals and capital flight. Under this circumstance the US Dollar – the world’s premier reserve currency – has the potential to appreciate against the single currency from defensive inflows. As markets look for a safe haven from the crisis the Pound Sterling, Swiss Franc, and Japanese Yen could also find themselves strengthening against the Euro.
The US Dollar faced a mix bag of data releases yesterday as Durable Goods Orders rebounded strongly from a -3.8% decline in January, to an impressive 5.7% improvement in February. However, US optimism was quelled slightly later on in the afternoon as Consumer Confidence shrunk by more-than-expected from 68.0 to 59.6 in March, and New Home Sales declined by -4.6% in February.
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