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The British pound sees mixed fortunes as global bond markets experience heightened volatility.
The pound-to-euro dipped 0.36% in value to fall to 1.1648 on Thursday, its lowest level since the first of July, a move that looks linked to global bond market anxieties.
A decision by the U.S. Treasury on Wednesday to intervene in the bond market looks to have triggered a spike of volatility across the foreign exchange market, with the pound seeing mixed outcomes.
But it was the dollar that was the outright FX loser of the Treasury's decision to buy billions of dollars of long-dated debt, i.e. those bonds with lifespans of more than ten years, an admission of concern that the recent selloff in that debt was becoming worrying.
The purchases are funded by minting fresh short-dated debt which costs less to service, meaning the net effect on U.S. debt was nil.
But, as bond market veteran and guru Mohammad El-Erian points out, there will be unintended consequences of the efforts.
"While it can help bring down longer-end yields in the immediate/short term, thus helping mortgage and other borrowing costs, it risks collateral damage and unintended consequences. Morever, the effects of this financial engineering are short dated unless followed by fundamental policy adjustment," says El-Erian.
The Cross-currency Effect
One obvious and immediate unintended consequence was a fall in the dollar: the currency slid 0.56% against the pound on the day with greater losses seen against other currencies.
And therein lies the clue for GBP/EUR watchers: greater losses were indeed experienced by the dollar against the euro.
If the EUR/USD rises by more than GBP/USD, what happens to GBP/EUR, the cross currency? It falls of course.
Above: The U.S. 30y bond yield fell after the U.S. government increased purchases of the underlying bond.
So we're seeing here a potential signal by the market that it is dipping into euros as concerns about the dollar grow.
That makes some sense since the Eurozone is considered a credible safe-haven venue to park money in when concerns are centred on the U.S., more so than the UK, which actually still pays more to service debt than its G7 peers.
So the view: while nervousness over debt lasts, the pound can come under pressure against the euro. Should nerves calm, the currency can re-establish support.
