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The European Summit Resulted in a Pleasant Surprise for Investors

A surprising result seems to be coming out of the Eurozone summit. Leaders within Europe managed to agree on restructuring 100 billion euros in Spanish banking debt. Funds from the European Union will be given directly to the banks so the Spanish government does not have to worry about a massive debt load increase.

Just before dawn on Friday morning, leaders of governments across Europe finished up the summit meeting. Although the agreement has been reached, it will not be enacted right away. Government leaders only agreed to it provided a single supervisor from the European Central Bank will manage the funds loaned out to the Spanish banking sector.

The agreement was reached due to joint efforts by Spain and Italy. Leaders from these two countries refused to agree on any other summit items unless the rescue was considered. After the Spanish and Italian debt crises have been dealt with, the European Union may use the same format of lending for Ireland.

Italian Demands a Different Set of Rules

The EU summit formatted a slightly different version of the lending rules due to demands given by Italy. From now on, the Eurozone can purchase bonds from debt-ridden countries. This would effectively work to lower their bond costs. As a part of this rescue program, Italy also urged the European Union to buy bonds with fewer stipulations and oversight than were felt in Greece. 

This latest agreement has managed to calm financial markets around the world. Previously, the European Union had suggested that bailout loans would have a preferential repayment status which was decried by investors. The new decisions have improved investor sentiment and simplified the lending process. Before, bailout money was going to be supervised by 17 different supervisors from various banks. With just one supervisor now, bailout countries will be able to better manage their loans and have one financial group to answer to.

Euro Soars

After the summit struck the short-term rescue agreement, the euro soared in Asian trading on Friday. By opening the European Stability Mechanism and the European Financial Stability Facility, Eurozone leaders have managed to improve the prospects of the euro and tame investors’ concerns everywhere.

Early in trading Friday morning, the euro jumped up to $1.2628. On Thursday night, the euro had only been trading at $1.2444 in New York City. Compared to the yen, the euro rose from 98.86 to 100.21. After the news from Europe, other high-risk currencies rose.

United States Dollar Falls

In recent weeks, the United States dollar had fared well against a basket of other currencies. As a safe haven, investors fled to the dollar when the outlook was bleak in Europe. Since the surprising results from the summit in Europe, investors have switched away from the United States dollar to risky currencies. The greenback stood at a low of S$.12716 against the Singapore dollar this morning after results came out. Likewise, the Korean won, Indian rupee and Malaysian ringgit all rose drastically against the dollar after news came out from Europe.

In early trading today, the United States dollar was at just 79.29 against the Japanese yen. Previously, the greenback had reached 79.46. Excluding Japan, analysts believe that many Asian currencies will drop over the course of the next week. Investors are still risk averse and as the situation continues to change in Europe, Asian currencies may fall.

The Chinese yuan also dropped 0.9 percent compared to the United States dollar. If this fall is sustained, it will mark the largest loss in a quarter since the Chinese Foreign Trade System was established in 1994.

The most surprising thing in today’s trading was the rise of the Philippine peso. Unlike other currencies out of Asia, the peso gained 1.6 percent against the United States dollar. This rise was driven by the expectation of investors that the Philippines may be facing a credit rating upgrade.

In the United States, investors had to face a difficult decision: what to do about Obamacare? The signature reform by President Obama’s administration had come under fire from Republicans in the United States. Judges on the Supreme Court chose to uphold the law passed by President Obama as entirely legal and constitutional. The impact of this bill on the United States economy has faced increasingly mixed and polarized reviews. Overall, investors can expect the majority of the impact on the United States dollar and economy to be generally neutral.  According to the Congressional Budget Office, this bill may even cut the cost of the United States deficit over the course of the next two years. 

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The European Summit Resulted in a Pleasant Surprise for Investors