Is sterling Europe's new safe haven?
While the debt crisis in the eurozone escalates, sterling is quietly becoming the investment haven of Europe. Optimism in the market started to fade on the back of the now-infamous Greek debt problems and while rating agencies downgraded the sovereign rating of countries such as Spain, the UK has still maintained its AAA rating and has so far escaped the threat of downgrade.
UK government bond yields, the rate at which the UK government borrows money, reached an all time low in November, close to that of Europe's powerhouse economy, Germany. Unsurprisingly given the market conditions, we have observed a safe haven demand for sterling as investors have been looking for an alternative to the euro.
Economic data from the UK adds further fuel to speculation that the UK economy is attracting an increasing number of investors. The Halifax Housing Price Index revealed higher than expected figures for October, showing a 1.2% rise while 0.1% was expected. It is not only government bonds that are benefiting from the financial flight from the eurozone. Houses and flats in London are being snapped up by both foreign buyers seeking property as a means to preserve capital and also from domestic homebuyers taking advantage of current ultra low interest rates.
The UK is considered a haven from the eurozone debt crisis amid fears that debt stricken countries, Italy and Greece, may be forced to default on their debt. Italy's President appointed former European Commissioner Mario Monti only a few days ago to form a new government, while in Greece new Prime Minister Lucas Papademos struggles to rebuild the country's credibility in the financial markets. Optimism about possible reforms under the new technocratic government has already started to fade and focus is shifting back to the region's huge debt problems. Italy's financial crisis deepened last week with borrowing costs touching a new record high rising above 7% and close to levels that have required other eurozone countries to seek bailouts. This is a clear sign that investors are worried about Italy's ability to tackle its debt crisis and prevent a debt contagion in the region.
In normal economic conditions when risk aversion in the market heightens, investment flows into the safe haven currencies, Japanese yen and the Swiss franc. However, with both the Bank of Japan and the Swiss National Bank taking measures to stop their currencies from rising, investors have been forced to explore other safe haven currencies. During the last few months, demand for these two currencies resulted in their appreciation, which threatens to damage the economies of Switzerland and Japan. To prevent their countries from being hurt, the two countries' central banks decided to step in the currency markets and intervene in order to curb their currencies from rising and warned that additional measures will be taken if needed. This leaves no other option than to explore other safe haven currencies elsewhere.
Although the UK economy suffers from slow growth, stubbornly high unemployment, slowing consumer activity and inflation
above the central bank's target, investors' faith in the UK recovery remains stronger than that in other major economies. Will the sterling become Europe's safe haven currency? Only time will tell. Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone.
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