Sterling stepped back from a seven-year high against a trade-weighted basket of currencies yesterday as some investors put money back into the euro on hopes of a deal over Greece. The pound was one of the refuges investors found earlier this year when they fled a weakening euro or the low yields most euro zone government bonds offered. The euro has done better over the past couple of months as German yields surged, and signs that a deal might be made to resolve Greece’s immediate financing problems were helping the euro yesterday.
The euro slipped this morning with investors adjusting positions as they waited for new developments in Greek debt talks. The euro was underpinned by optimism that Greece would secure a bailout deal with its official creditors. Nonetheless the prospect that the European Central Bank will continue to stick to its massive easing programme highlights its policy divergence with the US central bank, which is moving towards an interest rate hike. Greece offered economic reforms in exchange for the last payment of €7.2bn from the current aid programme. Without that money, Greece may not be able to make a €1.5bn repayment to the IMF due on June 30, risking a default and possible chaotic exit from the euro zone. After an emergency summit in Brussels, euro zone leaders ordered their finance ministers to hold fresh talks on Wednesday to thrash out the details ahead of a full meeting of all 28 European Union leaders on Thursday.
The dollar gained against the yen and the euro in Asia trade this morning, as risk-taking sentiment strengthened following signs of progress in Greece’s bailout talks and upbeat U.S. economic data. European Commission President Jean-Claude Juncker said Monday he was convinced an agreement between Greece and its international creditors over the country’s bailout program would be finalized this week, following the submission of a proposal by Greece earlier Monday offering new concessions. The greenback stretched its gains in Asia trade continuing the overnight momentum generated by the Greek news, coupled with upbeat U.S. housing data. Those factors combined to trigger the biggest one-day yield increase in benchmark U.S. 10-year notes in three weeks. Investors are now shifting their eyes to U.S. economic data such as durable goods orders for May to shape their views on the likely timing of a Federal Reserve decision to raise short-term rates.