EU Ministers Tell Greece More Action Needed
The euro has been pressured by Greece’s fiscal woes for the since late last year and other EU nations are not pleased. A poll taken by a German newspaper showed that a majority of Germans oppose aid to Greece and are in favor of removing Greece from the European Union if necessary. On Tuesday EU ministers told Greece that its will have to take additional measures to address the nation’s debt problems and calm ‘irrational’ financial markets. At the EU meeting ministers from Germany, Austria and Sweden stated that Greece should follow the lead of Ireland and Latvia who are cutting spending and wages aggressively. At the meeting Joerg Asmussen stated, “We made it clear the ball is in Greece’s court. Additional measures by Greece are needed.” After the meeting the ministers said that the 30 days they have given Greece to implement measures before reporting back to the group will only end with more demands for tax hikes, budget cuts or both.
No Specifics About Support For Greece at EU Ministers Meeting
Greece is the first EU country in eleven years to require a political pledge of support after Greek debt concerns prompted an attack by financial markets which has pressured the multi nation currency, lifted bond yields making debt servicing much more difficult. The ministers did not say anything specific about aid or support for Greece and put pressure on Greece to implement severe measures in exchange for a promise of support if things get out of hand. Austrian Finance Minister Josef Proell stated, “The pressure on Greece to consider further measures by March 16 has clearly increased. Germany, France and others — there (would) be a group of countries who can give this money to Greece to stabilize the country and also the euro zone. But this debate is not yet on.”
US Confident EU Can Handle Greek Situation says White House Spokesman
European Monetary Affairs Commissioner Olli Rehn said that economic experts from the IMF, the European Commission, and the ECB “will be on the ground in Athens in the coming days” to make sure steps to address the fiscal crisis are being implemented. In the US White House spokesman Robert Gibbs said that the United States is confident the European Union is capable of resolving the Greek situation but dodges a question about whether US president Obama was happy with the steps taken by the EU so far. Gibbs told reporters, “We have confidence, as they told the president, that the EU is capable of dealing with the situation.”
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Euro Zone Debt Woes Spread to Spain and Portugal
Euro sentiment remains negative among investors and traders after the G 7 summit did not offer any solutions to the debt problems of several Euro Zone nations. EU finance ministers told other G 7 participants that they would make sure Greece adheres to its budget cutting plans buy analysts say more action is needed to address Greece’s debt crisis. Roberto Mialich of Unicredit stated, “As long as EMU fears still loom and there is no strong signal from EU authorities that they will do something to tackle the situation in Greece, Spain and Portugal then euro downside potential will remain.” The troubled currency has fallen 10% since it hit a 15-month high of $1.5145 last November. Neil Mellor of Bank of New York Mellon said, “We remain bears and recently revised our downside euro/dollar target, seeing a move to the low $1.30s as definitely feasible, sooner rather than later.”
G 7 Did Not Address Currency Issues
The weekend G 7 meeting did not address currency issues but there was rising support for a levy on banks to help pay for rescue of the global finance system. Last month US president Obama sparked fears in financial markets when he proposed banking sector reforms. Despite positive U.S. jobs data on Friday risk aversion remains dominant and has favored the Japanese yen as investors seek safe haven. Some believe the yen could weaken later in the year but for now risk aversion is driving the yen higher. Akira Hoshino of Tokyo-Mitsubishi UFJ stated, “Market players think the yen might weaken in the longer term, but that trend has not taken hold yet. We will not see that kind of market unless market players start taking on risk and building up their positions.”
Yen Gains on Risk Aversion
The yen gained broadly and is near a 10 month high against the pound. The yen also hit a seven month high against the Aussie dollar. Experts believe the yen could weaken if the Bank of Japan takes action to loosen monetary policy to address deflation. Analysts say that in the near term the yen may get a boost from risk aversion and euro zone debt concerns. In an interview Japan’s Dai-ichi Mutual Life Insurance Co said that this years biggest investment risk would be a rise in US interest rates. David Watt of RBC Capital stated, “The risk aversion emanating from Greece, China tightening fears, renewed concerns about the performance of financial stocks, and Obama’s banking plan is taking a life of its own, and the fragility of the recovery is now a market millstone.”
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Markets Pleased With Bernanke’s Confirmation
Financial markets around the globe are celebrating the confirmation of Fed Chairman Ben Bernanke for another four year term. Prior to the confirmation the dollar rose in currency markets as the news emerged that Bernanke was likely to win senate confirmation. Yuzo Sakai of Tokyo Forex & Ueda Harlow stated; “The news prompted dollar-buying as there’s no adequate person who has (Bernanke’s) abilities.” The dollar rose after comments by White House officials and Republican Senator Mitch McConnell who said that Bernanke’s confirmation would garner senate approval. Last Thursday the senate voted to confirm Bernanke 70-30.
Fed to Retain Independence
Many saw the confirmation of Bernanke as a sign that the Fed may remain free of congressional meddling and that the central bank would remain independent. Dan Fuss of Loomis Sales stated; “This is very good news. It gets rid of probably the biggest worry of all for many investors, particularly foreign investors. They’ve been worried because they see Congress starting to interfere with the independence of the central bank. And the conclusion they draw, and me too, is, ‘There goes the currency, the dollar.’ You trust the central bank or you don’t. This confirmation takes that that uncertainty away for many.” The Fed was created in 1913 after several bank panics and is supposed to be apolitical but traditionally when the economy is bad the Fed chairman is blamed.
Opposition and Support
As if to confirm the politicization of the Fed Bernanke opponent Richard Shelby of Alabama, the senate’s leading Republican stated, “Bernanke fiddled while our markets burned. Ben Bernanke’s Federal Reserve played a key role in setting the stage for the financial crisis.” Many regard Shelby’s statement as political posturing. Bernanke’s opponents blame him for failing to spot the irregularities that led to the financial crisis and lax bank regulation. Bernanke supporter Chuck Schumer said that the partisan fight over the confirmation would send “the message that the Federal Reserve and its monetary policy decisions are under the thumb of Congress. Businesses will be faced with the prospect that the Fed might not be able to do what’s necessary for the economy because of pressure from Congress.”
Rates to Remain Low Says Fed
Many investors see Bernanke’s biggest upcoming task as devising exit strategies from the emergency measures taken by the Fed at the start of the financial crisis. Despite speculation to the contrary the Fed said after a two day meeting last week that rates would remain “exceptionally low” for “an extended period.”
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Rise in Risk Aversion
The yen and dollar rose broadly against other major currencies on Friday as investors questioned the speed and strength of global recovery. Falling stocks and commodity prices triggered a rise in risk aversion as investors dumped risky positions in favor of the safe haven of the dollar and yen. The euro was pressured by ongoing Greek fiscal problems and remarks by ECB President Trichet and German Chancellor Angela Merkel. US data indicated a rise in manufacturing and stable consumer price inflation which also helped to lift the dollar. Euro zone finance ministers believe that the Greek government repeatedly misled them about the size of Greece’s debt and are willing to impose sanctions against Greece if necessary. In late trading in New York the euro fell 0.9% trading at $1.4373. Dan Cook of IG Markets in Chicago stated, “What is really crushing the euro is additional concern about the serviceability of the massive amount of debt rung up in Greece.” Cook also said that until Greek fiscal problems are resolved, “we will likely see a lot of selling pressure on the euro.” The euro fell 1.3% against the yen trading at 130.51 yen.
US Data Meets Expectations
Analysts said that Friday’s US data met most expectations and showed improvement in regional manufacturing and stable consumer prices. Data also showed that consumer sentiment was little changed. Michael Woolfolk of BNY Mellon in New York stated, “It’s not a surprise to see better-than-expected manufacturing data. A point of this recovery, outside of fiscal stimulus, is that the U.S. manufacturing sector is already on the rebound.”
EU Problems Not Limited to Greece
Persistent Greek fiscal problems are expected to weigh on the euro into 2010. Problems in other EU countries, most notable Portugal, Ireland, Italy, and Spain, have also pressured the currency. Dean Popplewell of OANDA said, “I do not think the market has fully priced in the extent of the problems in Greece including the other troubled countries in the euro zone — Portugal, Ireland, Italy, and Spain. I don’t believe the situation is contained and I think investors will still demand U.S. dollars as some form of safe-haven.” Monday’s trading is expected to be thin as US markets close for the Martin Luther King holiday.
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Commodity Linked Currencies Gain
Commodity linked currencies rebounded from yesterday’s losses as investors concluded that China’s recently announced monetary tightening policies would not adversely affect the growth of the world’s third largest economy. The Aussie gained but markets remain nervous. Australia is one of the chief suppliers of iron ore and coal to China. Australian employers added 10,000 jobs in December which also helped boost confidence in the Aussie. Some currency experts believe that market reaction to China’s move was exaggerated. Omer Esiner said, “The reaction yesterday to China’s measures was a bit overstated, with the euro and most commodity currencies selling off. Today we are seeing a retracement of that move and the realization that the impact of the China’s bank moves won’t be so detrimental to the global growth scenario. ”
Markets Wait For Fed Beige Book Report
Today the Fed releases its ‘beige book’ which is a report on regional economic conditions and is used as a basis for discussion at FOMC meetings. The next Federal Open Market Committee meets January 27th. Some traders believe the report will be subdued pointing to a prolonged US recovery. Joseph Trevisani of FX Solutions Inc. stated, “Past Beige Books have said the same thing that things are slowly getting better, but today’s is probably going to be toned down. The market is really looking for something that will change the current complexion of things, and the Fed has been making some noise about pulling liquidity.”
Pound Gains on Euro and Yen
The pound gained on the euro and yen after Bank of England policymaker Andrew Sentence told the Guardian newspaper that the BOE will take a ‘wait and see’ approach to its quantitative-easing programs. Better than expected UK industrial production data also boosted the pound in currency markets. Adam Cole of the Royal Bank of Canada stated, “The comments from Sentance gave a sniff of a turn in the U.K. rate cycle, and that lifted the pound. It’s a bit premature in our view, but the comments moved the markets.”
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Dollar Viewed as Safe Haven Currency
In late 2008 when the global recession hit the dollar initially rose as traders and investors sold off risky assets for the safe haven of the US dollar and the Japanese yen. The Federal Reserve took various emergency measures to address the financial meltdown and credit crunch. Measures taken by the Fed included reducing interest rates to record lows and introducing quantitative easing.
Trading on Risk
In 2009 when some economies displayed ‘green shoots’ of recovery investors dumped the dollar in favor of higher yielding assets. Throughout the year the dollar traded mainly on risk instead of fundamentals. When the news was bad the dollar gained and when the news was good investors sought out higher yielding currencies such as the Aussie and Kiwi dollars. Low US rates enabled investors and traders to use the dollar to fund ‘carry trades’ where investors use currencies with low rates to fund the purchase of higher yielding assets. Neil Mackinnon of VTB Capital stated, “This year, particularly since the Federal Reserve adopted ‘quantitative easing’ as a formal policy and cut interest rates to virtually zero, the U.S. dollar effectively became for investors and traders a funding currency. So investors and traders would borrow in dollars and use those funds to invest in higher-yielding investments like equity markets, like commodities, emerging markets, high- yielding currencies.”
Year End Dollar Rally
The dollar rallied broadly after the November non farm payrolls report that showed that US employers cut fewer jobs. Most non farm payrolls throughout the recession showed job cuts in the hundreds of thousands and the November report showed that only 11,000 jobs were lost. Many analysts thought initially that the low figure was a misprint. Since then figures from the US indicate that recovery is under way. The dollar gained against the euro which had been pressured by EU banking problems and the credit downgrades of several EU nations.
Fed Rate Hike Key Question
When the Federal Reserve will raise rates continues to be a key question in currency markets. Many currency experts believe that recent positive US economic data will prompt the Fed to raise rates early in 2010. Investors remain concerned about mounting US debt and massive deficits caused by ongoing wars in Iraq and Afghanistan and various stimulus programs. The US deficit is now at a record $1.4 trillion dollars for the 2009 fiscal year. 2010 should be an interesting year for the dollar!
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Dollar Gains vs. Yen in Thin Trading
The dollar gained on the yen and was supported by year end dollar buying by Japanese companies in thin holiday trading. The yen also fell against the Aussie and Kiwi dollars on Tuesday. Investors remain focused on the Fed and when it will raise rates and withdraw stimulus measures. Improved US economic data has prompted many investors and currency specialists to rethink forecasts when the Federal Reserve will raise rates. The dollar has recovered from a 14 year low against the yen. Currency markets will be watching Fed policy makers statements closely and will review other US economic data such as employment and labor market figures. Kazuyuki Takami of Bank of Tokyo-Mitsubishi UFJ stated, “The market is shifting its focus to the recently emerged theme of whether the Fed exit strategy will be sooner than expected. And it will closely scrutinize upcoming U.S. economic data.”
Positive US Employment Data Expected
After the number of US jobs lost shrunk to 11,000 in November many investors expect the December non-farm payrolls report due on January 8th to show more signs of US recovery. After a fall of about 19% in 2008 the dollar has gained 1.7% against the yen. The euro has gained 2.5% vs. the dollar in 2009. The Bank of Japan is expected to keep rates low which may put downward pressure on the currency in 2010.
Yen May Fund Carry Trades in 2010
Traders and investors say that once currency markets get a stronger sense of Fed exit timing the yen will become the currency of choice for carry trades. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company said, “Yield differentials between the U.S. and Japan have started to widen slightly, showing evidence the market is conscious of the prospect of the U.S. exiting its easy policy. With that perception behind the dollar, if the U.S. heads towards the exit, the dollar-funded carry trade is expected to wane as Japan is seen as more likely to ease further.”
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Dollar Supported by Positive Fed Assessment
Currency experts expect the US dollar to hold onto last week’s gains. Recently the dollar has been supported by evidence of a stable US recovery and the Fed’s willingness to withdraw emergency measures in February 2010. Despite the fact that the Fed has repeatedly said it would keep rates at record lows positive US data has prompted speculation that the Fed may raise rates sooner than expected. The year end sell off of assets that have gained over the year such as stocks, commodities and emerging currencies has broadly benefited the dollar. The ICE futures’ dollar index .DXY which tracks the dollar’s value against a basket of six major currencies has been rising since early December although it has fallen 4.3% during 2009. For the week the DXY is up 1.9% the best weekly gain since April.
Pakistan Coup Rumors Trigger Safe Haven Flight
The troubled euro is on track for its worst weekly performance in eight months. The euro fell 2.4% this week against the dollar. The euro has been pressured by Greek sovereign debt concerns and a Standard and Poor’s downgrade. Austrian banking woes have also stung the euro in currency markets. Todd Elmer of CitiFX stated, “The euro is feeling the ill-effects of ongoing strains in Greece and we doubt that this euro-negative factor will soon abate.” Safe haven currencies rose on Friday after rumors of a coup in Pakistan. Currency markets were also shaken after it was reported that 11 Iranian troops had entered Iraqi territory and raised the Iranian flag at a disputed oilfield.
US Third Quarter GDP Report Due Next Week
The flight to safe haven sent the Swiss Franc and the Japanese yen higher. The yen gained on the dollar, euro and the Aussie dollar. The Swiss franc, widely seen as a safe haven currency gained on the euro. Although the currencies regained most losses the euro was down 0.4% against the franc at 1.4957 francs and the dollar was down 0.6% against the yen at 89.46 yen. There is a slew of US data to be released this week and investors are sure to be paying close attention. Third quarter GDP reports are due along with housing data, and reports on personal income and spending.
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Investors Wait For Fed Results
The US dollar fell slightly on Wednesday in advance of the ongoing Fed meeting taking place on Tuesday and Wednesday. The euro rose from a two and a half month low as traders took positions waiting for the results of the Fed meeting. The pound was boosted by better than expected UK employment data and the Aussie surrendered recent gains on weak Australian growth data. The Australian data prompted speculation that the Reserve Bank of Australia would put off raising rates. Investors remained focused on the Federal Open Market Committee’s meeting. The FOMC is expected to leave rates at record lows and investors will be searching the FOMC statement for any indication of when the Fed may tighten up its loose monetary policies. Michael Hart of Citigroup in London stated, “It had looked like the euro was breaking further lower, and the ever so slight possibility (building in the market) of the Fed tightening or winding down liquidity, which would be supportive for the dollar. But I don’t think we can expect too many fireworks from the Fed. They will be fairly cautious.”
EU Banking Concerns Pressure Euro
Concerns about the health of the Euro Zone’s banking sector have pressured the euro in recent trading sessions. A press report from Austria had said that the nation’s largest cooperative bank had been put on a watch list prompted banking concerns among investors. Lingering concerns about the Greek downgrade and the fiscal health of the EU member weighed on the euro in currency markets.
Pound Rallies on UK Employment Figures
New EU data showed that the Euro Zone manufacturing and service sector continued to improve in early December. Against the US dollar the euro last traded at $1.4578 after hitting a low of $1.4503 on Tuesday. The pound rallied as new UK employment data showed that the number of unemployment claims fell in November, the first improvement in almost two years. The pound was up 0.5% against the greenback at $1.6365 and traded at 89.05 pence against the euro.
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Euro Pressured by Austrian Banking Concerns
The euro reached a two and a half month low against the US dollar as stocks fell and investors expressed concerns about the European banking sector. Lingering concerns about the fiscal health of Greece were not allayed after Greek Prime Minister George Papandreou announced spending cuts. Earlier Greece’s rating had been cut from A- to BBB+ by Moody’s. The Austrian press reported that the country’s largest cooperative bank, Oesterreichische Volksbanken had been put on a watchlist by the Austrian central bank’s financial market regulators. A spokesman for the bank said that the bank is not at risk of nationalization and that the press reports were inaccurate. Austria recently nationalized Hypo Alpe-Adria Bank International AG sparking investor concerns. On Monday the surprise announcement that Abu Dhabi would provide a $10 billion dollar bailout for Dubai Inc. eased some concerns about European banks, many of which are heavily exposed to Dubai debt. Dubai stocks .DFMGI gained as much as 3.4% after the announcement.
Improvement in US Economic Data
The US dollar hit a two month high against the euro as data showed that US industrial production gained and U.S. producer prices rose 1.8% in November. The data comes on the heels of better than expected US non farm payrolls figures which pushed the dollar higher. Camilla Sutton of Bank of Nova Scotia in Toronto stated, “What we are seeing recently is the improvement in some important U.S. data and rising sovereign risk in the euro zone. Both provide a bid tone to the U.S. dollar.” Michael Woolfolk of BNY Mellon in New York added, “We’ve had a string of very good U.S. data releases compared to Europe, and today’s data suggests inflation is picking up again, so the whisper out there is that the Fed will hike rates sooner than expected.”
Eyes on Fed Meeting
All eyes remain on the ongoing Federal Reserve meeting taking place on Tuesday and Wednesday. Investors will be watching closely for signs of early withdrawal of stimulus programs which may trigger a much wanted rate increase by the Fed.
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