Global financial markets recently become alarmed about the soaring inflation rate of China, which is now well above the target of the government. Many investors and analysts think that the Chinese inflation is threatening the stability of the global economy. China’s inflation is now somewhere in the vicinity of 4.4%, soaring to a 25-month high. This is a 0.8% jump from last month’s inflation rate and way above the 3% target annual rate.

As pointed out by several indicators, it seems that the probability of China’s central bank raising the base interest rates is now becoming more certain. Both the forex market and the equity-bond markets are reacting. Bondholders are now selling their five-year Chinese government bonds at low prices that the bond yields are rising sharply. This is also an indicator that investors are expecting a hike in the interest rate before the present year ends.

Meanwhile, Australia’s effort to address its ballooning inflation has led to the inevitable option of raising its banks’ base interest rate from 4.5% to 4.75%. There are also similar market and economic pressures in other Western countries that may force them to raise their interest rates. Ballooning inflation is the main factor that prompts policy makers to resort to interest rate hikes. In so doing, it is expected that borrowing will be less attractive thereby leading to low financial liquidity or cash supply.

The latest economic figures from China include the foreign exchange value of the yuan that recently reached a 17-year-high against the dollar mainly because of the second bout of US quantitative easing that exerted downward pressures on the forex value of the dollar. The Cginese currency has rallied against the US currency by 25% since its 2005 landmark revaluation. Although the People's Bank of China has recently allowed the yuan to appreciate in order to pacify the aggressiveness of the US, many critics are still not contented and say that the yuan should at least rise by 40% against the dollar.

On the other hand, the Chinese government and some European governments are questioning the decision of the US Federal Reserve to again engage in a quantitative easing programme that will further devalue the dollar and possibly contribute in the further worsening of the inflation in China. The governor of the Bank of England, Mervyn King is among those who are debating against the escalating currency tensions that could possibly lead to protectionisms and global economic imbalance. He particularly referred to China and Germany because of their large trade surpluses.

It was Thursday (December 9) last week that the euro was again significantly depreciated because of the stripping of Ireland’s ‘A’ credit status. Fitch was the first credit rating agency that stripped Ireland of its high credit status. As a result, the forex value of the euro slid thereby allowing other major currencies being traded against appreciate in value. The British sterling, for instance, appreciated at €1.175.

The credit rating agency Fitch has reduced Ireland’s credit status from ‘A’ rating down to BBB+ rating. Despite of the downgrading of Ireland’s credit status, the economic prospects of Ireland were still considered as stable. According to Fitch, the downgrading of Ireland’s credit rating was primarily because of the high costs involved in restructuring and sustaining the banks of Ireland. Of course, the bailout grant for Ireland is an emergency loan that still needs to be repaid. Consequently, the overall trust of the financial markets on the eurozone has significantly weakened because of the recent bailout of Ireland.

In an official statement released to the media, the credit rating agency Fitch has said that Ireland’s former credit rating was not anymore consistent or compatible with the its capacity to pay its debts and investment trustworthiness. Meanwhile, other credit ratings agencies, Moodys and S&P have maintained their on Aa2 and A ratings, respectively. However, they are reviewing the sovereign rating of Ireland for possible downgrading.

Compared to Greece’s BBB- Fitch rating, Ireland still has advantage despite of the fact that they both needed to be bailed-out to prevent insolvency and possible spread of the sovereign debt crisis. The bail-outs of these two countries has eroded the foreign exchange value of the euro and also threatened the economic stability of the entire eurozone.

One does not need to become a forex trader to understand the negative impact of the eurozone crisis on the forex value of the euro. However, it is not just anymore just a currency exchange issue but an issue of economic and political unity of the eurozone countries and the European Union in general.

After the official bailout of Ireland, many investors and analysts are still worried about the economic stability of the region as other economically weaker countries, such as Spain and Portugal, which may eventually need to be bailed-out.

According to some economic analysts, the threat of Irish defaulting on its sovereign debt and its being bailed-out sent the wrong message to the markets not only about Ireland but about the entire eurozone.

The ongoing eurozone debt crisis is threatening to spread like wildfire. For most analysts, it is not anymore just an issue of economically weak countries defaulting on their debts. It is also not anymore just an issue of euro’s forex value. More importantly, it is already an issue of euro’s survival as a single European currency. Along with it is the threat of political and economic disintegration of the European continent.

After Ireland officially bailed-out quite recently, Italy is now being pulled into the quagmire of sovereign debt crisis. The markets are afraid of the possibility that Italy might be the next domino piece that will fall after Greece and Ireland. This of course will cause further market volatility and dimmer economic prospects for the eurozone.

As the eurozone debt crisis threatens to spread like an epidemic, the foreign exchange value of the euro further weakened against a basket of other major currencies. Meanwhile, the borrowing costs of eurozone countries that are deeply in debts soared even higher. The financial trading sector, analysts and policymakers are again fearful about the future prospects for the euro and the European Union itself. Unfortunately, the recent bailout of Ireland was not enough to boost the confidence of investors.

Instead of appeasing the already volatile financial trading sector, the recent bailout of Ireland triggered the fear that it might be leading to a domino-effect wherein Ireland is just the second domino piece to fall after Greece. The economically weakest member-countries of the eurozone seem to be next in line to be infected by the debt crisis contagion. The markets are now worried about Italy, Spain, Portugal and Belgium.

As a result of market volatility and growing unease, the international borrowing costs for the Italian and Spanish governments recently soared to their record high levels. International money markets are now imposing higher interest rates for these countries. As a benchmark, the borrowing costs for Germany compared to the borrowing costs for Italy and Spain are now at their highest levels since the euro was adopted approximately twelve years ago. The interest imposed on the German government is only 2.7%. On the other hand, Italy and Spain must pay 4.8% and 5.7%, respectively.

Although the borrowing costs for Italy and Spain are still not as high as the 11.7% imposed on Greece, these cost are still considered as precariously high for large economies. By comparison, the United Kingdom only pays 3.2% interest in its loans.

Europe’s single currency has weakened against the dollar yesterday (November 30), sliding down below the critical $1.30 level. This was the first time it dropped below this level for almost three months already. Meanwhile, it also weakened against the British sterling and the US dollar. For a period of only more than one week, the euro shed 6.5% of its forex value against the dollar.

Some economic analysts think that the worse is yet to come. This pessimistic attitude is shared by the deputy head of UBS’ global economics division, Paul Donovan. He is convinced that the ongoing eurozone crisis is hardly halfway through.