The euro fell after the impact of the good news faded away. Initially the Single Currency was boosted by news over the weekend that the ECB showed willingness to buy Spanish and Italian debt. However, market sentiment soon fell when it began to speculation the political difficulty of reaching some form of fiscal union within the EU on dealing with the debt crisis and ratification from national parliaments on the new powers of the EFSF rescue fund. Additionally, the news of the U.S. credit downgrade by Standard and Poor’s began to take more weight as fears of a recession in the world’s largest global economy will slow down the rest of the global economies. Risk off sentiment dragged EURUSD down to 1.4204 from an early session high of 1.4400.
Sterling rose against the dollar to its highest level in over two months as the U.S. credit downgrade led investors to cut their positions in the greenback and to seek alternative currencies, choosing the Pound over the euro which is affected by its own debt issues, and trying to avoid traditional safe havens like yen and swiss due to their governments warning of intervention to halt their strength. GBPUSD hit a session high of 1.6469 and held firm for most of the session before slipping towards the end of European trading and the open of US markets, falling to 1.6343.
The Swiss Franc began the European session with a record high against the dollar, but soon moved off as the greenback advanced from 0.7525 to 0.7649. Investors feared letting the Swiss currency strengthen too much for fear of an intervention by the Swiss central bank which already attempted to curb the franc’s rise last week by cutting interest rates.
USDJPY extended its fall from the previous Asian session to touch as low as 77.54. The U.S. credit downgrade caused a mass dollar sell off as investors preferred the yen, perceiving it as a safe haven at the moment. The USDJPY is still far from the lows that triggered the Bank of Japan to intervene in the markets last week to curb yen strength but investors are still cautious of that possibility arising again. However, some believe that under these current circumstances, it might be an impossible feat for Japan to control yen strength because if risk aversion last longer, this will keep dollar under pressure.