The elephant in the euro’s living room is trumpeting loudly and will not be ignored. Whilst it would be exaggerating to say that a sovereign default by Greece is now only a matter of time, it would not be a gross overstatement. Athens is selling off state assets and applying further spending cuts to demonstrate compliance with the strictures attached to EU and IMF loans. Ports, airports, utilities, the national lottery, even some islands are on the block as the country struggles to turn capital assets into cash to pay the phone bill.
The Greek debt fiasco is the main reason why the euro has been receiving a bit of a beating. The secondary reason is that the European Central Bank may be taking a step back from the interest rate increases upon which investors had been pinning their hopes. After its May policy meeting the ECB signalled there would be no second upward move at least until July. The net result for the euro has been the loss of eight US cents and more than three sterling pennies in less than three weeks.
The main beneficiary of investors’ misgivings about the euro has been the US dollar, not because investors are particularly enamoured of it but because it is the easiest and most liquid currency against which to sell the euro. In the background is a slight change of tone at the Federal Reserve. The Fed has revealed it is at last considering a strategy to “normalize” US interest rates; i.e. to take them higher. A move before the end of the year is possible, if not yet likely.
Sterling has taken advantage of the euro’s discomfiture by keeping a low profile and doing nothing particularly wrong. UK interest rates are not going up any time soon but nor, apparently, are anyone else’s. Although investors see no compelling reason to buy the pound, neither can they find any fresh reason to sell it.