EU Pressure on Greece

Bad news from Europe continues as the pound continues its decline and Investors remain concerned that Greece’s austerity measures may not be enough. On Wednesday the Greek government is set to announce 4.8 billion euros ($6.5 billion USD) of additional deficit cuts. Greece is under pressure from the EU and investors to add additional austerity measures. New measures include increased taxes on tobacco and alcohol and more cuts in bonus payments to public workers. The bonus cuts are unpopular with public workers who have scheduled a strike for mid March. EU Monetary Affairs Commissioner Olli Rehn told the Athens government it must announce additional measures “in the coming days” to reassure EU official’s fears that current measures fall short of what is necessary to resolve the nation’s fiscal crisis. Greek Prime Minister George Papandreou said in a speech that the cuts will be “painful” and that public workers whose benefits have been cut and their wages frozen “will have to get by on less.” Tax hikes are in the works and Papandreou acknowledged that while raising taxes may stall economic growth the “primary threat is not the recession, but something worse, finding ourselves unable to borrow.”

EU to Aid Greece

The troubled euro rose vs. the US dollar gaining 0.3% trading at $1.3605. News of further Greek budget cuts prompted the Euro’s gains as investors believe that further Greek austerity measures will make aid to Greece more attractive to other EU nations, most notable Germany where opposition to Greek aid is widespread. German officials say that the EU is putting together a plan to grant Greece about 25 billion euros if needed. Many believe that any aid to Greece will be a band aid sort of approach and will not address the nation’s real problems. Jessica Hoversen of MF Global Ltd. in Chicago said, “The bailout is not going to fix the problem. If you propose that Greece implement more austerity measures, you court more social unrest and a further decline in growth. If you don’t, it may allow Greece to skirt fixing the structural problems that put them in this position. These big macro issues are like snow that piles onto the roof until it breaks through.”

Pound Under Pressure

In addition to euro zone troubles the pound has come under pressure due to political uncertainty in the UK.  Recent polls show that the UK may have it’s first minority government since 1974 and will make efforts to reduce the UK’s debt politically difficult. John Doyle of Tempus Consulting said, “The pound is in freefall. There seems to be nothing supporting the pound as political worries build. There’s still some downside to the sterling.”

Euro at Four Month Low vs. Pound

The troubled euro fell to a one week low against the US dollar and a four month low vs. the pound. EU finance ministers met to discuss the Greek fiscal crisis and the unreliability of Greek statistics. The ministers believe that Greece has misled fellow EU nations about the size of its debt and are running out of patience with Greece. Rob Minikin of Standard Chartered in London stated, “The Greek developments are definitely casting a shadow on the euro. It underlines how a strong euro could compound problems in the region, and reinvigorates the argument for a weaker euro.” The ministers from the 16 nations that use the euro as a common currency are meeting in Brussels to look at plans to curb Greece’s massive debt. Last week the European Commission said there were “severe irregularities” in Greek data used to calculate the nation’s debt.

Greece’s Credibility at Stake

Last month Fitch Ratings, Moody’s Investors Service and Standard & Poor’s lowered their ratings for Greece boosting concerns about a possible Greek debt default. On January 13th Moody’s said that the economies of Greece and Portugal faced a “slow death” by dedicating more of their already strapped resourced to paying debts. Jeremy Stretch of Rabobank International said, “It’s all about credibility and perceptions, and if there’s a building credibility gap on Greece, the euro will come under pressure. The Greek finance minister will give a presentation, and the question is whether it will be perceived as credible.” At the present time Greece is widely seen as the EU’s weakest member nation.

Bank of Japan to Continue Current Policies

The yen fell against 12 of the 16 most traded currencies on Monday. Bank of Japan Governor Masaaki Shirakawa said that the BOJ will continue its current policy of fighting deflation. Shirakawa told a quarterly meeting of regional branch managers, “The central bank is aiming to maintain an extremely accommodative financial environment.” US markets are closed for the Martin Luther King holiday.

Fed to Keep Rates Low

The US dollar fell vs. the yen as disappointing retail sales figures for December reinforced the view among investors and traders that the Federal Reserve will keep rates low well into 2010. The dollar held onto gains vs. the euro after the European Central Bank left rates at record lows. Analysts said that the combination of last week’s non farm payrolls report combined with disappointing retail sales data are cause for caution about the pace of global recovery. Joe Manimbo of Travelex Global Business Payments stated, “The U.S. continues to recover at a really slow pace. If you add that to last week’s jobs data, that certainly dampens expectations of an early Fed rate hike. Consequently, that sets the stage for a weaker dollar.”

Greek Fiscal Problems Trouble Euro Zone

The dollar was also pressured by remarks from New York Federal Reserve Bank President William Dudley and Chicago Fed President Charles Evans who said the Fed would need to be certain that economic recovery is firmly underway before the Fed would begin to tighten monetary policies. At the same time the ECB kept its rates at 1% for the eighth straight month. The euro was also pressured by remarks by European Central Bank President Jean Claude Trichet who said that the economic outlook for the euro zone is ‘uncertain.’ Statements by German Chancellor Angela Merkel at a private forum hosted by Die Welt newspaper put further pressure on the euro. Merkel spoke about Greek fiscal problems and said, “The Greek example can put us under great, great pressures. So the euro is in a very difficult phase over the coming years.”

Aussie On Track For Parity With Greenback

The Aussie dollar was the big winner vs. the greenback in today’s trading sessions. The Aussie gained as much as 0.9% against the US dollar trading at 93.28 U.S. cents, a two month high. Rising commodity prices and demand helped currency linked currencies to gain broadly. A recent Australian report said that Australian employers added 35,200 jobs in December. The Reserve Bank of Australia is widely expected to increase rates by a quarter of a percentage point at its next meeting February 2nd.

Chinese Data Boosts Risk Appetite

The US dollar suffered a bad day on Monday as worse than expected US jobs data and comments from a Fed official who said rates are likely to remain low for some time put downward pressure on the dollar in currency markets. The dollar was also pressured by positive Chinese export data which boosted risk appetite. Last Friday the US labor Department reported that US employers cut 85,000 jobs which was disappointing to investors who had expected more positive jobs data from the US. On Monday St. Louis Federal Reserve Bank President James Bullard said that rates are likely to remain low for quite some time. Dag Muller of SEB in Stockholm stated, “The dollar went sour after the non-farm payrolls data. If the data didn’t meet expectations then it feeds the thought that there will be a prolonged period of time before the Fed hikes rates, which is what Bullard said. Stocks are higher too and oil is bid, which is another driver of a weaker dollar.”

Bullard’s Comments

After St. Louis Federal Reserve President James Bullard’s comments the euro broke the $1.45 barrier and some experts believe the euro will rise as high as $1.4800. Joseph Capurso of Commonwealth Bank said, “Expectations that the Federal Reserve will keep rates on hold for the foreseeable future, encouraged by Friday’s weak employment report have held the dollar down.” The European Central Bank meets this week and is widely expected to keep rates at record lows. US data to be released this week includes U.S. retail sales, industrial production and inflation data which could further test the dollar.

Commodity Demand Lifts Aussie, Loonie

Many currency experts believe that the Canadian and Australian dollars are on track for parity with the greenback due to rising commodity prices and increased demand. Accelerating U.S. growth is expected to increase demand for Canadian oil and natural gas and Chinese economic expansion will boost demand for Australian iron ore and coal. John Kyriakopoulos of National Australia Bank Ltd stated, “The global economy is going to strengthen, and the recovery is going to broaden out from what has so far been a China-, Asia-led global recovery.”

Yen May Reclaim Carry Trades

A recent rise in US bond yields combined with the recent dollar rally may once again make the Japanese yen the currency of choice for carry trades in 2010. The dollar/yen currency pair has become more attuned to bond yields as both currencies compete for favored funding status. Any shift in bond yields or rate expectations impacts both currencies. Richard Franulovich of Westpac in New York stated, “I think the yen will reclaim its status as the funding currency of choice in 2010. Even if the Federal Reserve raises rates by 25-50 basis points, that would mean U.S. rates will still be markedly above Japan’s.”

Employment Figures Dim Rate Hike Expectations

On Friday the dollar’s recent rally came to an end as US Labor Department figures showed that US employers shed 85,000 jobs in December. The worse than expected figures pared speculation that the Fed will raise rates anytime soon. Most experts had predicted that December’s figures would follow the same trend as November’s jobs figures which showed that US employers added 4,000 jobs in November. The ICE Futures U.S. dollar index fell 0.6% to 77.454. Some Fed officials said in the minutes of December’s monetary policy meeting that persistent unemployment might make it necessary to expend and extend asset purchase programs. Vassili Serebriakov of Wells Fargo said, “All together this report will probably work against the more optimistic expectations on the U.S. economy. It is negative for the dollar, and we are seeing it getting weaker. But we don’t expect to see a complete reversal in the dollar gains from last month based solely on this report. We need more data points.”

Euro Zone Data

Trading could be volatile this week as the results of euro zone data impact markets. Recently released euro zone data includes euro zone GDP, euro zone employment figures, German industrial production, producer price index output and other pieces of euro zone data.

Euro Surrenders Early Gains

High yielders such as the euro and Aussie dollar gained on the greenback in early Tuesday trading. Later in the day the euro fell 0.2% against the dollar reversing earlier gains. The dollar gained 0.4% against the yen trading at 91.99 yen. The yen also fell against 16 other major currencies as Japanese manufacturers increased production at the fastest pace in six months in November prompting a rise in risk sentiment. The Japanese currency is widely seen as a safe haven currency and usually falls as risk appetite increases. Low Japanese rates also make the yen attractive for carry trades. The dollar was also helped by expectations that Tuesday’s consumer sentiment report will be dollar positive. Geoffrey Yu of UBS AG stated, “The U.S. is probably going to outperform many economies. That’s why we have a view on a stronger dollar. Throughout 2009, the market has been overpricing the downside U.S. economic risk.”

US Retail Sales Figures Add to Optimism

The dollar remains at a two month high against the yen in thin holiday trading. Monday’s US retail sales figures for December added to investor optimism. Australian and UK markets reopened after the Christmas holidays but trading remains thin and many Japanese companies have begun year end holidays. Rising US Treasury yields have also lifted dollar sentiment among investors. Despite Fed statements to the contrary many traders and investors are speculating that the Fed may raise rates sooner than expected and will start to withdraw stimulus measures. Johan Javeus of SEB stated, “Anything that points in the direction of the Federal Reserve raising interest rates earlier than previously thought will support the dollar — there has been no indication of this from the Fed but U.S. data recently has been coming in on the strong side.”

Aussie at Twelve Day High

The Aussie rose to a 12 day high and gained 0.8% against the US dollar trading at $0.8950 and some expect the Aussie to rise to the $0.90 level. This year the dollar has fallen against 16 of the most traded currencies with the exception of the yen. Some investors remain skeptical of the dollar’s recent gains.

Dollar At 15 Month Low Monday

On Monday the US dollar hit a fifteen month low as investors speculated that US interest rates would remain low for an extended period. The pound was hammered by news that Fitch said that the UK was at risk of losing its triple AAA credit rating. Fitch said that of the four major economies the UK was most at risk and the news sent the pound plummeting in currency markets. David Riley of Fitch said that if there was a further stimulus package offered by the UK government the highly indebted country is at risk of losing its superior credit rating. Lutz Karpowitz of Commerzbank stated, “The Fitch news was a reminder of the longer-term issues facing the UK.”

Pound Hammered on Rating Concerns

The pound fell from a three week high of $1.6844 on Monday to as low as $1.6600 and last traded at $1.6655, a decline of 0.6%. Against the euro the pound fell to 90.00 pence per euro. A decline in European equities and falling oil prices dampened risk sentiment and the euro hovered around $1.50. A weaker than expected German ZEW survey showed investors more pessimistic than at any time in the last four months. James Hughes of CMC Markets stated, “The ZEW was a pretty weak number, but the fall in the euro wasn’t huge initially and it quickly fizzled out. It looks like the whole theme of dollar weakness will dominate for some time to come, as long as (monetary and fiscal) stimulus remains in place.”

Dollar Index Up

On Tuesday the dollar index which measures the US dollar against a basket of six major currencies was up 0.2% to 75.176 .DXY. Speculation that the US will continue to keep rates low has enabled investors to use the dollar for carry trades to finance the purchase of higher yielding assets especially when stock markets rally. Officials from the US Federal Reserve are expected to speak Tuesday and investors will be looking for any changes in US monetary policy.

Better Than Expected GDP Figures Pressure Dollar

Better than expected US GDP figures sent investors in search of higher yielding assets putting pressure on the greenback and the Japanese yen which are seen as safe haven assets. Once again the Aussie and Kiwi dollars were big winners. The Aussie gained 2% against the US dollar trading at US$0.9162. Benchmark rates in Australia are 3.5% the highest of any of the G 7 group of industrialized nations. The Kiwi dollar also rose a full 2% against the US dollar. The New Zealand dollar last traded at US$0.7342.

Euro Gains on Dollar

The euro vs. dollar rate rose 0.2% and the euro traded at $1.4751. During most of the past year the euro has been seen as a barometer of risk sentiment and usually gains on positive economic data. Both the US dollar and the yen declined against the euro the most on seven weeks. The greenback ad yen traded lower against a basket of 16 major currencies. US GDP rose 3.5%, higher than the predicted 3.3% and caused a sharp increase in stocks.

Optimism About Global Recovery

David Tien of Fischer Francis Trees & Watts, stated, “We’re in this sweet spot where growth is not great but respectable and rates are low. That’s forcing money out into riskier assets.” The GDP figures spurred optimism about global economic recovery sending investors in the direction of riskier and higher yielding assets.

Investors Drawn Back to Carry Trades

Earlier disappointing data from the US consumer and housing sectors had pared recovery expectations triggering gains in the dollar and yen. US GDP data has drawn traders and investors back to carry trades. Michael Woolfolk of Bank of New York Mellon stated, “With Q3 GDP living up to its billing this morning, players are returning to the carry trade again, driving the dollar and yen decidedly lower.” A decline in US unemployment claims also contributed to the rise in risk sentiment.

Risk Appetite Pressures Dollar

The US dollar fell to a 14 month low against a basket of major currencies on Thursday. (Oct. 8, 2009) as rising stocks prompted an increase in risk appetite. The Aussie dollar rose due to strong employment data and the euro rose to a two week high of $1.48. Soft demand for 30 year treasuries put more downward pressure on the greenback. Investors have watched US debt auctions closely this year and many are concerned with massive US deficits.

Stocks Up

US stocks rose as Alcoa Inc posted unexpected profits and retailers reported positive monthly sales and US unemployment claims hit a nine month low last week adding to recovery hopes. Fabian Eliasson of Mizuho Corporate Bank stated, “It’s just a continuous recovery play, We’re seeing good numbers all over the place.” The ICE Futures U.S. dollar index which measures the US dollar against six major currencies fell to 75.767, the lowest since August 2008. The DXY was last down 0.9% at 75.775 .DXY.

Aussie Dollar Wins Again

The dollar vs. yen was down 0.2% at 88.41 yen. Currency analysts said that some Asian central banks including those from emerging economies were buying dollars in an attempt to slow the dollar’s slide. The Aussie dollar rose 1.8% on better than expected Australian jobs data and the Aussie dollar rose to a 14 month high.

Trichet’s  Statement Helps Euro

The euro was up 0.6% after European Central Bank president Jean-Claude Trichet said that US support for a strong dollar policy was very important. Matthew Strauss of RBC Capital Markets said, “It was actually what he didn’t say that caused the market to buy the euro. Before Trichet’s briefing, there was chatter in the market that he may give more forceful comments on having a ’strong’ dollar. But Trichet just gave the standard language so we saw some relief rally for the euro.” Trichet also said that the Euro Zone economy is stabilizing and will recover gradually. He also warned that a recovery will not be fast and said that interest rates are appropriate for the current economic climate.

Thursday was the first anniversary of the central banks coordinated effort to cut rates to bolster confidence after the collapse of Lehman Brothers.

Dollar’s Low Yields Prompts Selling

After a three day display of relative strength the US dollar fell Tuesday and is now hovering near a one year low against a basket of major currencies. The dollar’s low yields prompted forex traders and investors to sell the greenback in advance of the FOMC meeting and the up coming G 20 summit in Pittsburgh. It is widely believed that the Fed will keep rates at historic lows.

Kiwi Dollar a Winner Again

Once again the Kiwi dollar rose, this time to a 13 month high against the US dollar. The Kiwi rose over a cent to $0.7315, the highest since August 2008. New Zealand GDP unexpectedly rose during the second quarter signaling an end to a prolonged recession. The rise in the Kiwi sent investors in search of other higher yielding currencies and the Aussie dollar is another big winner in advance of the Fed meeting. Although economic data showed the Euro Zone service sector grew for the first time in 16 months and manufacturing output grew for the second straight month the data had little effect on the euro in forex markets.

G 20 Ahead

Investors remain cautious in advance of the Fed statement and the G 20 conference and some experts expect both events to adversely affect stock markets. Ian Stannard of BNP Paribas stated, “Overall the FOMC and the G20 are unlikely to disrupt the recent positive tone in asset markets and that’s likely to see the trends in currency markets resume. I will be looking at the currency pullback I expect today to be very much providing a buying opportunity for the pro-cyclical and commodity currencies.”

DXY Down

The dollar index or DXY was down at 76.046. The dollar index has declined 2.5% this month as investors sold the dollar in favor of higher yielding assets spurred by confidence in global economic recovery and the belief that the Fed will continues to keep rates low. The downward trend for the US dollar is expected to continue in advance of the G 20 summit.