Pound climbs against the euro

 

The pound hit a 22-month high against the euro today as fears grew about the strength of Spain's economy.

A pound bought 1.23 euros as the UK was seen as a "safe haven" after figures confirmed Spain was back in recession and nine Spanish banks had their credit ratings downgraded.

The drop in the euro will be welcomed by UK holidaymakers heading to the continent but will worry manufacturers trying to grow exports to Europe, the UK's biggest trade partner.

The pound at times rose to its highest point against the US dollar since September amid growing signs that the strong recovery in the US is starting to slow.

The UK is seen as a safe haven despite suffering a double-dip recession because it is one of the few large western economies to have held on to its cherished AAA credit rating.

Kathleen Brooks, a director at currency trader Forex.com, said: "The eurozone crisis is the key driver of why the euro has been weakening.

"The downtrack in the euro has been building up for a while. Things in the UK are not great, but in Europe they are worse."

She believes the pound will continue to gradually "grind" higher against the euro but it would take another escalation in the eurozone debt crisis for it to make substantial gains.

If the pound were to hit 1.24 against the euro, it would be at levels not seen since the recession in 2008, which wiped about 25% off the value of sterling.

Spain was the main focus of attention today after figures revealed its economy contracted by 0.3% in the first quarter of 2012, plunging it back into recession.

But numerous countries in the eurozone are struggling to bring in harsh austerity measures as their economies slip into recession or show lacklustre growth.

In France, socialist presidential candidate Francois Hollande is expected to try to unpick a recent eurozone treaty on debt reduction if he is voted in, while Holland faces an election after the government failed to agree its austerity package.

Prime Minister David Cameron has warned the debt crisis across the Continent is not even halfway through and has blamed it for the UK's current malaise.

Another reason that the pound has strengthened in recent weeks is that minutes from the Bank of England recently suggested it is less likely to embark on another round of quantitative easing (QE), or money printing, which weakens currencies.

In the US, however, the Federal Reserve has hinted that more QE could be on the cards if the economy deteriorates.

PA

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