Fitch Downgrades Greece’s Rating
The US dollar rose for the third straight trading session as risk aversion was fueled by falling stocks, government deficits and the downgrade of Greece’s credit rating. Fitch’s rating agency downgraded Greece’s rating from A- to BBB+. The move followed a report by Standard and Poor’s that said Greek banks faced Europe’s biggest risks. Dubai concerns lingered after a report said that Dubai World could expect no ‘meaningful’ help from the Dubai government. The decline in risk sentiment lifted the dollar as traders and investors unwound carry trades involving the use of low rate US currency to purchase higher yielding assets. Risk appetite has already been dimmed by Fed Chairman Bernanke’s remarks who said that the US faces a prolonged recovery and that the Fed would keep rates low for an ‘extended period.’
Bernanke Says Fed to Keep Rates Low
Bernanke’s remarks dampened speculation that the Fed would raise rates sooner than 2010. The speculation was prompted by last Friday’s US non farm payrolls report that showed that US employers cut fewer jobs than expected. Markets had speculated job losses of 130,000 for November and the report showed only 11,000 job losses for November, fewer than since the global recession began. Friday’s jobs data and the dollar’s rise had prompted speculation that the yen would become the preferred source of funding for carry trades. Michael Woolfolk of BNY-Mellon in New York stated, “We’re in a period of dialing back risk, though I still think there’s a material amount of risk appetite out there.” He also said the dollar would continue to struggle until the Fed signals it is ready to raise rates.
Premature Optimism
Against the euro the dollar traded at $1.4842 after Monday’s one month low of $1.4756. The dollar traded at 88.84 against the yen, a decline of 0.8%. Jun Kato of Shinkin Central Bank Research Institute had this to say about last week’s premature optimism, “It was unreasonable that U.S. non farm payrolls for a single month alone raised such optimism, as concerns persist over Dubai debt problems and the U.S. banking sector is not necessarily in good condition.”
