Pound Pressured by Deficit Concerns
On Friday the yen fell and the pound rose on news that Moody’s said the ratings of both the US and the UK were not under threat prompting a rise in risk sentiment among traders and investors. The pound fell against the dollar for the fourth straight week due to concerns about rising deficits in the UK. Chancellor of the Exchequer Alistair Darling told Parliament that the UK budget deficit will be about 611 billion pounds ($990 billion USD) in the next four years, more than previously predicted. Ian Stannard of BNP Paribas SA said, “The pound failed to gain any real support against the dollar on the back of the comments coming from Moody’s. This underlines the overall weakness of sterling.” Participants in a summit of asset managers said that the pound was their ‘least favorite’ currency and some predicted the pound may be used for carry trades in 2010.
BOE to Leave Rates Low
Recovery from the recession in the UK has been slower than its other European counterparts and has pressured the pound in currency markets. Darling also said he wants to tax bank bonuses at 50% a move not popular with bankers. Last week Darling also said the UK economy will shrink by 4.75% this year. Last week Bank of England policy makers said they would leave rates at 0.5% and will maintain their 200 billion pound asset purchase program in an attempt to lower borrowing costs and prevent deflation. The pound traded at $1.6244 against the dollar and 89.96 pence against the euro.
Euro Flat vs. Dollar
The euro remained flat against the dollar and some currency analysts said investors were reluctant to buy euros due to the Greek rating downgrade and the negative outlook for Spain. Earlier in the week Moody’s Investor Service said it would not downgrade the ratings of the 17 countries with AAA ratings but that some of the countries will be hard pressed to manage their debt burdens.
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Bernanke to Keep Rates Low, Cites Economy, Unemployment
On Tuesday (Dec. 8th) the dollar was pressured by remarks by Fed Chairman Bernanke who said the US economy is still ‘fragile’ and that unemployment is likely to remain high for some time. Bernanke’s remarks doused market speculation that the Fed would raise rates on last week’s positive US jobs data. Markets had predicted about 130,000 job losses for November and when the data showed job losses of 11,000 many experts were stunned. William Dudley, president of the New York Federal Reserve said later that the US economy was still weak and that rates would remain low for an ‘extended period.’ Jun Kato of Shinkin Central Bank Research Institute stated, “Bernanke’s remarks reminded people that the economy is not rosy yet.”
Euro Pressured by German Data, Greek Rating Concerns
US stocks fell on Tuesday raising safe haven demand pushing the dollar higher against the euro. The euro was also pressured by German data that showed that German industrial output unexpectedly fell 1.8% in October and Greek banking concerns. Fitch Ratings cut Greece’s A- rating to BBB+ with a negative outlook for Greece’s economy. A recent Standard and Poor’s report said that Greek banks are Europe’s ‘riskiest.’ Greece is widely considered to be the Euro Zone’s weakest member. Lingering concerns about Dubai spurred safe haven buying. James Hughes of CMC Markets stated, “While you’ve got weak data coming out and doubts about Greece and Dubai you will get fickle markets ruled by fear.”
European Shares Decline
In addition to falling US shares, European shares declined 1.6% and Moody’s rating service downgraded six Dubai-linked issuers saying that no ‘meaningful’ government support could be expected for Dubai World. The dollar has declined for much of the year due to speculation that US rates will stay low while those of other nations will rise increasing the yield advantage of those currencies over the dollar. Against the euro the dollar traded at $1.4826 and against the yen the dollar traded at 89.41.
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Euro Gains on Dollar
On Thursday the euro gained on the US dollar after the European Central Bank said it would withdraw extraordinary measures to address the recession. Jean-Claude Trichet said the next round of 12 month refinancing for banks would be the last and the central bank left rates at historic lows. The ECB also raised its economic forecast for 2010. The euro is now near a 16 month high and traded at $1.5140 and also gained on the yen. Boris Schlossberg of GFT Forex stated, “He hinted that they’ll do something about an exit policy, so the first knee-jerk reaction was euro positive, but he’s not ready to endorse a full exit quite yet, so it’s really neither overly supportive of, nor detrimental to, the euro.”
Trichet’s Comments
The euro also got a boost when the Bank of America said it would repay bailout funds provided by the government. Currency analysts said that Trichet had to be cautious as any hint of a rate hike would cause traders to bid up the euro, particularly since the US Federal Reserve announced it would keep rates low for an ‘extended period.’ Hidetoshi Yanagihara of Mizuho Corporate Bank had this to say about Trichet’s comments; “He’s saying the outlook for economic growth is still uncertain, which means he’s not overly confident, and it seems that is capping the euro gains.”
Bernanke and Geithner Speak
In the US Federal Reserve Chairman Ben Bernanke addressed congress stating his case for a second term as Fed Chairman. Bernanke said the Fed’s actions have prevented the recession from becoming worse. Bernanke also promised to maintain price stability and said that rising deficits must come down eventually. Many currency analysts and traders believe that massive US deficits will undermine the dollar and cause inflation. U.S. Treasury Secretary Timothy Geithner said that the United States must convince the world that the government will be more fiscally responsible. He also restated his belief that a strong dollar is important.
Quick Forex Tip: Political conditions play a major role in global currency trading. Political instability can cause a currency to lose value. Recently political problems and deficit concerns in Greece caused the euro to fall in global currency trading centers. Market psychology although difficult to define can also affect market perceptions and can either help or pressure currencies.
UAE Central Bank to Provide Emergency Liquidity
Investors have calmed down since Dubai World requested a six month moratorium on debt payments. The actions by he UAE Central Bank to provide emergency liquidity to Dubai calmed investor fears. The dollar erased last weeks gains and continues its long term decline as risk aversion eased. The dollar fell against most major world currencies as better than expected pending home sales and actions by Dubai World raised risk sentiment. Sebastien Galy of BNP Paribas SA stated, “The Dubai effect is fading. Equities have had time to rally, and the foreign-exchange market is basically following.” During the current recession currencies often follow the lead of stock and commodity markets.
Dubai World Begins Talks With Banks
The Standard & Poor’s 500 Index rose 1.3% and European stocks rose putting downward pressure on safe haven currencies such as the US dollar and the yen. Dubai World announced it has begun talks with banks to restructure $26 billion in debt and is seeking to put off payments of half of its $59 billion debt easing default fears among investors. The euro gained on the dollar after London-based Markit Economics reported that European manufacturing grew for the second straight month. The Australian dollar rose 0.6% to 92.14 U.S. after the Reserve Bank of Australia announced it would raise rates to 3.75%.
Japanese Government to Stem Yen’s Appreciation
Japan’s National Strategy Minister Kan said that the government has agreed to step in and try to stem the yen’s appreciation which is hurting exporters like industrial giants Sony and Toyota. Investors will be watching the US jobs report due December 3rd and job losses are expected to be around 480,000 up from last month’s job losses of 466,000. The report will also contain third quarter productivity and labor costs. On December 4th the non farm payrolls and unemployment report will be released and unemployment is expected to remain at 10.2% pointing to a prolonged recovery.
Quick Forex Tip: Euro currency trading requires a lot of research and investors must keep track of economic information from the twelve member nations. The economy of just one nation can affect the euro’s exchange rate. In 2010 political uncertainty and deficit concerns about Greece caused the euro to fall considerably in global forex markets. Euro currency trading can be exciting and very lucrative for investors who have done their homework.
