Euro hits one-month high as Moody’s keeps Spain rating unchanged

Euro pushed higher today in the Asian trading session, hitting a one-month high above $1.31. The single currency was already advancing since yesterday on growing speculation that Spain will apply for a credit line.

What gave an extra boost to the euro today was an announcement by Moody’s that it kept its credit rating on Spain and thereby eased fears of a further downgrade to junk status. Reaffirming Spain’s rating at investment grade will help Spanish bond yields from rising for now.

Investors look to the EU Summit in Brussels on Thursday and Friday this week where leaders will discuss Spain and Greece.

If Spain resorts to requesting financial assistance from the EU this will be positive for the euro. Germany is softening its stance on providing additional money to Spain. Furthermore, a credit line instead of a fully fledged bailout is better because it will not shut out Spain from the debt markets, unlike what happened to Greece, Portugal and Ireland when they received a bailout.

Greece is also on the EU summit agenda. The heavily indebted country is looking for a two-year extension to meet its budget target.  There will also be discussions on labour reforms in Greece that involve eliminating automatic wage increases and reducing severance payments. Greece is opposing these reforms. However, if no agreement is reached soon, this will delay the next bailout tranche to Greece by November. This could destabilize the euro.

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