Dollar hit a 3 month high against the euro in Asian session trade today in the aftermath of the decision by the S&P to revaluate the ratings of more than 1.46 Trillion euros of covered bonds. Covered bonds are secured by assets like residential-mortgage loans but remain on a bank's balance sheet, and in the case of a default investors have a claim both on the bank that issued the bonds and the assets backing them.



The S&P move was procedural in nature rather than a response to a new credit threat. Nevertheless, the ratings agency noted that “New risks to the creditworthiness of covered bonds have emerged during the financial crisis. One of the key considerations in our analysis of covered bonds--the ability to refinance or sell assets in the event of a bank failure--can be compromised in a highly stressed environment."

Covered typically carry a shorter maturity than the asset they back, putting the banks at the risk of a maturity mismatch that could create serious re-financing difficulties in times of credit stress in the capital markets.

The S&P news was only the latest credit concern to hit the Eurozone, which has seen the ratings of its member Greece lowered to BBB+ from A- by S&P. Fitch lowered Greece’s rating two days ago. The combination of lingering credit problems in the Eurozone along with a more upbeat assessment of the US economy by the Fed has created a cascade of stop running in the Asian session as first the psychologically key 1.4500 level gave way and then 1.4400 barrier broke as well.

The pair now finds itself at key support level of 1.4400 and may consolidate there for most of the European session given the absence of any event risk on the calendar. Still the sharp selloff has caught many late EUR/USD bulls by surprise and if the US data today proves supportive to the greenback the liquidation by euro longs could accelerate suggesting the possibility of a test of 1.4000 figure before the year end.