Currencies Reaction to S&P Downgrade – Initial Gaps Closed

Forex markets opened with strong moves in the wake of S&P’s historic downgrade of the US. Some currencies jumped  with Sunday gaps. Some currencies gained against the dollar, while other lost ground – the moves were exactly as expected. We already got one meaningful verbal intervention, and another one is still to be seen. In the meantime, gaps are closing.

The safe haven currencies, the Swiss franc and the yen, jumped against the dollar. So did the pound. The euro jumped, but this has a lot to do with the the first verbal intervention:

The ECB’s statement about bond buying – agreed at an emergency Sunday summit gave a boost to the euro. The Canadian dollar, dependent on the US, retreated against the greenback. The “risky” Aussie and Kiwi retreated.

But the gaps were closed.

And now we have a second verbal intervention – made by Japanese finance minister Noda – the G7 agreed on to take action in forex markets.

Actions are still awaited from the aforementioned promised G-7 coordinated action, and from the ECB’s moves in Italian bond markets. Given the previous moves by the ECB, the moves might limited and very disappointing, and this could resume the falls of EUR/USD, below the critical 1.4282 line, which was just above the close and temporarily closed.

For more on EUR/USD, see the euro to dollar forecast.