Euro exchange rates today: Euro dollar rate falls towards 1.2 as the Spanish situation causes investor alarm - Bond yields at 7.5pct

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Category: Exchange Rates

Published on Monday, 23 July 2012 09:22

Written by Will Peters

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Murcia admitted on Sunday it will seek up to 300m EUR from the central government, two days after Valencia made its own plea for help.

The euro (Currency:EUR) is under the hammer against the dollar and a host of other currencies this morning; the euro dollar exchange rate is approaching the 1.2 level, in line with a number of analyst forecasts.

The euro pound exchange rate is however 0.08 pct higher at 0.7787; this pair has been weak for weeks now and it appears investors are just not willing to push it lower.

This morning we are faced with a number of issues, but Spain is at the front.

A surge in Spanish bond yields this morning has been precipitated after Murcia became the second Spanish region to ask for state aid.


Murcia admitted on Sunday it will seek up to 300m EUR from the central government, two days after Valencia made its own plea for help.

Spain's 10-year bond yields remain firmly in the danger zone as a result, at over 7.5 pct (up from 7.275 pct on Friday night).

7 pct is typically seen as the level at which a country's borrowing costs becomes unsustainable.

Markit is reporting that the cost of a Spanish credit default swap (which pays out if Spain defaults on its loans) has jumped to 630 basis points (from 603 on Friday). That means it would cost 630,000 EUR a year to insure 10m EUR of Spanish five-year debt.

In its latest forecasts, the central bank estimated that Spanish GDP fell by 0.4 pct in the second quarter of 2012, a sharper fall than the 0.3 pct contraction recorded in Q1. That would mean Spain's economy was 1 pct smaller than a year ago.

Germany’s Vice-Chancellor also allowed the question of a possible Greek euro exit to resurface, noting that such a scenario had “lost” its fear factor.

Most importantly, in a weekend interview in Le Monde, ECB President Draghi said that inflationary pressures are falling faster than was expected (even as recently as the last ECB board meeting).

"We see this as a clear signal that another rate cut is on the cards, and the comments support the view of our European economists who think we could see another cut to the refi rate as early as September," says a morning note from UBS.