EUR/USD declined 0.3% today to $1.3179 after S&P cut Spain’s credit rating by two notches to BBB+.
S&P also downgraded the country’s economic outlook to 'negative' and said that it expects Spain’s GDP to contract by 1.5% in 2012. The contraction was deeper than an earlier contraction of 0.5%. It also said that the beleaguered country will come under severe pressure as it will have to raise more debt to support its ailing banks.
EUR/USD slumped 0.5% yesterday night, soon after the news was out, and continued to fall sharply in early Asian trade over fears that the debt crisis could worsen. It also raised systematic risks and revived contagion fears. In related news, the Spanish unemployment rate rose from 22.9% to 24.4%, higher than the consensus estimate of 23.5%.
Meanwhile, Italy managed to sell €5.95 billion worth of bonds, close to the top of the planned €3.75-6.35 billion. However, the average yield on the ten-year bonds at the auction was 5.84%, higher than the 5.24% sold in the previous month, while the bid-to-cover ratio was 1.48 times, lower than the 1.65 times a month ago. However, EUR/USD quickly pared all its day’s losses in the European trading session and reached an intraday high of $1.3242.