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The euro remains the ‘only game in town’ as it fell to a level not seen against the US dollar since July 2010

The euro remains the ‘only game in town’ as it fell to a level not seen against the US dollar since July 2010 and is once again in touching distance of a 4 year low against the pound.

For once, it wasn’t Greece’s problems that dominated the headlines but instead, Spain, the fourth largest economy in the euro zone.

The European Central Bank (ECB) rejected a proposal by the Spanish government to bolster its newly nationalised bank, Bankia, the fourth largest banking group in Spain. It was reported that Spain’s plan to recapitalise the bank with a €19 billion bailout by tapping European Central Bank (ECB) funds was refused out of hand by the central bank.

The Spanish government’s proposal involved injecting bonds into Bankia’s parent company BFA and then having it exchange those bonds for cash through the ECB’s three month refinancing window. This would have allowed Spain to avoid having to sell the debt directly in the credit markets. However, according to the report, the ECB told the Spanish government that Bankia needed a capital injection and that the plan violated European Union financing policies.

Meanwhile, the Bank of Spain governor Miguel Fernández Ordóñez has announced that he will resign on 10 June instead of waiting for his term to expire on 12 July so that his replacement can get involved with the financial system reform that moves into full swing in Spain on 11 June.

Ordóñez explained in the statement that had he stayed on until mid-July, his replacement would have had only one month to make important decisions about the financial sector reform and to examine the evaluations made by private brokers on the Spanish banking system. By leaving ahead of time, “the new governor will be able to fully participate in these important decisions from the very beginning”, Ordóñez explained.

Demand for the dollar’s safe haven appeal continues unabated after reports that Egan-Jones downgraded Spain’s credit rating to BB- from B. The 10-year Spanish government bond yield also struck a new six-month high in the capital markets yesterday.

Whilst the pound continues to benefit from the widespread euro weakness, the state of the UK economy continues to cause concern and the pound is showing signs of weakness against the majority of other currencies.

In the UK, the Land Registry reported that UK house prices in England and Wales tumbled after the temporary holiday in stamp duty for first time buyers was withdrawn in March. According to Land Registry data, the average price of a house in England and Wales fell by 0.3% in April to an average of £160,417. On a year-on-year comparison, the average house price in April in the UK was down by 1.0%.

This carefully watched data backs up recent surveys from the likes of Nationwide, Halifax and the Royal Institution of Chartered Surveyors.

Paul Hunt, Managing Director of Phoebus Software, a bespoke loan and savings management software developer, said the figures were affected by a “double whammy” of the return of stamp duty for first time buyers and receding confidence among lenders as wholesale money market rates have recently risen as an effect of the ongoing but deteriorating euro zone sovereign debt crisis.

“According to LSL’s House Price Index, transactions in April dropped by 18% and that such a precipitous drop in activity hasn’t pushed prices down further shows most of the drop in transactions was predominantly for lower value properties,” suggested Hunt.

“As the Eurozone crisis has continued to develop this month, it’s likely ongoing caution from lenders will put further downward pressure on prices in May,” Hunt predicted.

Meanwhile, news agency Bloomberg reported that the Bank of England (BoE) policy-maker Ben Broadbent argued at Monday night’s meeting between the BoE, the Financial Services Authority and the government that the elevated risk premium currently seen in the money markets have created a higher ‘hurdle rate’ for companies’ investments.

Furthermore, in his opinion, firms may implicitly be guarding against the risk of a rare but very bad economic shock and these ‘high hurdles’ may be stunting growth in the supply side of the economy.

As regards the possibility of further quantitative easing (QE) in response to the materialisation of those threats, Broadbent said that, “and, were the (still unlikely) worst-case risks in the euro area actually to be realised, then our own monetary policy would again play its part in mitigating the impact.”