Sterling made a recovery against the US dollar today on speculation of an imminent announcement from the Prudential that it is abandoning its AIA takeover.
Prospects of the deal being called off saw the Pru price jump 6% to 572p, and sterling rise to $1.459, from $1.450, as the currency was buoyed by demand from international investors needing sterling to buy the UK insurer's shares.
Elsewhere in the currency markets, the euro fell again against the US dollar on more negative economic news, and as investors are losing faith with the euro as a reserve currency.
The European Central Bank said yesterday that European banks could write down another €90bn (£75bn) this year, linked to bad loans and falling asset values. The market also reacted to Fitch's downgrade of Spain on Friday, which was announced after the markets closed.
By lunchtime the single currency traded at $1.215, or 1.2% lower than the previous day, and near its lowest level in four years.
"This is a much more frightening situation than the one in 2008 – this time there's nobody to bail out the system, whereas in 2008, we had the governments," said Gary Jenkins, a credit analyst at Evolution Securities. "But now, who will rescue the sovereigns? If they fail, it's game over."
Investors are concerned the draconian budget cuts in countries such as Spain, Italy, Greece and Portugal will hinder economic growth in southern Europe for years.
"Fiscal tightening and budget conservativism may have come too late for Greece and its global lookalikes," said Bill Gross, managing director of Pimco, the world's second-largest bond investor, in a newsletter published on the company's website. "Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that likely face New Normal [low] growth rates and a continued bumpy journey toward that destination."
