Euro Update

Last Friday, and again during the early part of this week

, the pound drifted higher against the euro. By the end of Tuesday it had done all the work it was going to do and since then it has hovered around the 1.2650 level, sitting on a net gain of about one euro cent. Against the US dollar the euro's pattern was very similar. It started this Friday morning with a loss of nearly two US cents.

Ten days after the Brussels breakthrough, in which Germany made the concession to support Spanish banks using directly-inject money from the bailout funds, the euro's euphoria rally was a distant memory. The currency slipped even further from favour after a "Eurofin" meeting of euro area finance ministers. Just about all they came up with was an agreement to make 30bn available, promptly, to troubled Spanish banks. Given that the earlier agreement in Brussels had been for an amount of 100bn, 30bn seemed somewhat mean to investors and they asked themselves whether the Brussels Breakthrough was all it was cracked up to be.

There was more negative news from Madrid and Paris, where the prime minister and the president were desperately back-tracking on their pre-election promises to scrap the nastier aspects of austerity and dish out new goodies to all comers. President Holland's solution is to cut spending and increase taxes on rich people and foreigners; Prime Minister Rajoy's is to cut spending and increase sales taxes. They both have tens of billions to find in the next 18 months.

At the moment, M Hollande would appear to have the most room for manoeuvre. He can borrow ten-year money at 2.25% and unemployment is only 10%. It is a different matter for Sr Rajoy, who has a quarter of his workforce looking for a job and half the country's young people out of work. Worse, he must pay a usurious 6.5% rate of interest on his ten-year borrowings - if not more.

But investors are not unduly worried about any of this. Whilst the euro did move lower during the week it did not move far and there was never any sense of urgency. It looks as though investors are preparing themselves for the long haul; one which might or might not end up with Greece and Spain still in the single currency but which is sure to last many months.

Sterling maintained a low profile, assisted by a shortage of UK economic statistics and a surplus of mischievous news about the Olympic games. The week's potentially most important development comes this Friday, when the Bank of England announces the details of the "funding for lending" scheme first aired at the Mansion House dinner a month ago.

In essence, the scheme will make 80bn available to banks on condition they lend it on to small and medium-sized businesses (SMEs). The Bank's intention is that the scheme should increase total lending by 5%. The word on the street is that the Bank will

Whether it will work is anybody's guess. There are undeniable obstacles in its way: Banks are under pressure to build their reserves in case of a disaster in Euroland; lending money, whatever its source, eats into those reserves. And there are doubts about companies' appetite for debt. Those doing well are reducing it; those hoping to set up a speculative business will be no better a credit risk tomorrow than they were prior to the new scheme.

But somebody is doing something. That ought, of itself, to be vaguely helpful to the pound. Whether it will be enough to take it higher against the euro is a different matter. On Wednesday sterling touched its highest level against the euro since October 2008. Anyone needing to buy euros should give serious consideration to locking in at least some of their requirement at current levels, seven cents better than the average for the last 12 months.

by: Marven Caulker

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