Sterling reached a 7 1/2-year high against the euro yesterday as people looked for safe havens after Greece’s debt crisis worsened and Athens imposed capital controls. The pound slipped from those highs but was still up on the day, with traders citing intervention by the Swiss National Bank as one reason the euro was recovering. But most traders thought any bounce was likely to be brief. Greece looks virtually certain to miss a debt repayment to the IMF today, after its European partners refused to extend a credit lifeline when Athens announced a referendum on bailout terms. Sterling has been gaining on revived expectations British interest rates will rise at the end of this year. A jump in wage growth and signs the Bank of England’s policy committee is divided over keeping rates at record lows have prompted money markets to price in a rise as early as December.
The euro strengthened against the dollar yesterday despite Greece’s institution of capital controls and shutting banks ahead of an expected default on its debt. The euro recovered and then some from losses over the weekend as Greece’s debt drama took unexpected turns. Athens’ shock announcement of a July 5 referendum on creditors’ bailout proposals effectively broke off negotiations that would extend the government’s financial lifeline. On Monday, Greek Prime Minister Alexis Tsipras implied that Greece would default on a 1.5 billion-euro debt payment due Tuesday to the International Monetary Fund, a partner in the bailout with the European Commission and the European Central Bank.
The dollar dropped against the euro and the yen, as the latest developments in the Greek debt crisis ratcheted up uncertainty in the financial markets and fueled doubts that the Federal Reserve would increase U.S. interest rates this year. Currencies swung as increased tensions between the Greek government and its international creditors over the weekend rattled markets and called into question Greece’s place in the euro zone and the very integrity of the common currency itself.