Japanese Growth Exceeds Estimates

The Aussie dollar gained on most major currencies after Japan’s economic growth exceeded predictions prompting demand for riskier assets. The Aussie also gained after Reserve Bank Governor Glenn Stevens said that the central bank will “likely” have to adjust policies to keep inflation within a target range of 2 to 3%. Sue Trinh of RBC Capital Markets in Hong Kong stated, “The better-than-expected headline for Japanese GDP seemed to put a floor under risky assets. Clearly, it all depends on headlines out of Greece but the market seems to be settling down and reduced volatility is typically quite favorable for risky assets.” The Aussie gained 0.2% on the Japanese yen trading at 80.02 yen and the Kiwi dollar traded at 62.92 yen. GDP in Japan, Australia’s second-largest trading partner after China, rose 4.6% in the fourth quarter, better than the 3.5% forecast by most economists.

Aussie Gains Limited by New Chinese Reserve Requirements

At present benchmark interest rates are 3.75% in Australia and 2.5% in New Zealand making both currencies attractive to investors seeking high yielding assets. Recently both currencies have been pressured by a rise in risk aversion prompted by concerns about the fiscal health of some EU member nations. Aussie gains were pared after the People’s Bank of China said that it will raise reserve requirement for banks by 0.5% on February 25th. China is Australia’s largest trading partner.

Euro Gains For First Time in Five Days

The beleaguered euro rose for the first time in five days as investors wagered that the currency’s losses due to Greece’s fiscal crisis were too rapid to be sustainable. Fiscal problems in Greece, Portugal and Spain have put enormous pressure on the euro since late last year. Greek Prime Minister George Papandreou said that Greece is ready to address the crisis and make the necessary reforms and predicted the crisis would end in the “very near future.” Omer Esiner of Travelex Global Business Payments stated, “There’s been a little moderation of concern about the debt crisis. Investors are still wary about the situation, but most of the bad news is reflected in the value of the euro. It’s come a long way down in a short period of time.” Prime Minister Papandreou told reporters in Moscow that “Greece now is indeed in a difficult economic situation but it’s not the end,” after talks with Russian leader Vladimir Putin who said, “I think, hope and believe that we’ll emerge from the situation in the very near future and emerge stronger than we are right now.”

World Economic Forum Participants Support Bernanke

On Thursday the US senate voted to reconfirm Ben Bernanke despite fierce opposition. Bernanke faced the stiffest opposition since the confirmation of Paul Volcker in 1083. At the World Economic Forum taking place in Davos Switzerland Bernanke has many supporters. John Mack the chairman of Morgan Stanley said of Bernanke; “Ben got us through—along with a team of others—we got through a big crisis… And I’m sure there are people that would say if he was really doing his job that wouldn’t have happened. You and I both know that’s bogus. He has been in that role for a short period of time so I don’t think we’d have panic but I do think it would hurt the markets — we saw the markets sell off about 5% last week but I think the markets are feeling somewhat better because there is support and it looks like he will be voted in.”

Former President Clinton Supports Bernanke Confirmation

Former US President Bill Clinton also expressed support for Bernanke. About Bernanke’s nomination by Obama Clinton said; I will say this: I think he is right to reappoint Mr. Bernanke, for two reasons. One is that I think since this crisis occurred in September of 2008, Bernanke’s decisions have been very good, they have kept the American economy going and given us a chance to heal. Secondly, he said something that is very important to say, that the crisis occurred because regulation in the past had been too lax.” Clinton also said that Bernanke deserved the nomination because of his guidance through the worst financial crisis since World War Two.

Tight Senate Vote

The Senate voted 70 to 30 to confirm the former Princeton professor and Bernanke faced the stiffest opposition since the legislative body started confirming Fed chairmen in 1978. Bernanke faces opposition from many Republicans. Senators who supported Bernanke cited the strategies Bernanke used to address the worst recession in decades. Senator Carl Levin, a Michigan Democrat stated; “Chairman Bernanke’s performance in addressing the economic crisis and his current efforts to significantly enhance financial regulation to help prevent future crises outweigh his past mistakes.”

Exit Strategy Biggest Challenge

Many believe Bernanke’s biggest challenge will be devising an exit strategy to dismantle the various emergency measures the Fed took to address the crisis. The Fed’s low interest rates are seen as dollar negative in currency markets and investors have speculated for months when the Fed will raise rates. Despite the speculation about rates the Fed said last Wednesday that it would keep rates “exceptionally low” for “an extended period.”

Dollar Gains on US Data

The US dollar rose against most major currencies on Friday bolstered by US data indicating a rise in manufacturing and stable consumer price inflation. Ongoing concerns about the Fiscal health of Greece pressured the euro despite the government’s promises to raise taxes and cut spending. 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.”  Euro zone finance ministers said that the Greek government misled them about the size of the nation’s budget deficits and indicated a willingness to impose sanctions if needed.  The euro fell 0.9% vs. the greenback on Friday trading at $1.4373. Greece experienced its first recession in 16 years in 2009 and is widely seen as the Euro Zone’s most indebted member. Debt accounts for 120% of Greece’s Gross Domestic Product.

Dollar on Track For Further Gains

Despite mediocre US economic data some traders believe the dollar is on track for further gains. Michael Woolfolk of BNY Mellon in New York said, “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.” The euro had fallen in Asian trading on rumors, later proved false, that German Chancellor Angela Merkel would resign. Last Thursday European Central Bank President Jean-Claude Trichet said that Greece would receive no special treatment and said that recovery in the Euro Zone was uneven.

New US Data Due This Week

US data due this week will likely be a focus of currency markets. Data on U.S. net capital flows, producer prices, housing starts, and initial jobless claims will be released this week and investors will be searching for clues about the direction of the US economy. Tim Evans of Lind-Waldock stated, “The markets will possibly be nervous with U.S. data that’s not favorable. If those numbers come in bearish, then that would further discount the dollar.”

Austria’s Largest Cooperative Bank on Watchlist

Austrian banking woes have further pressured the euro in currency markets. Austria nationalized Hypo Alpe-Adria Bank International AG and the Austrian press reported that the Austrian central bank and its financial market regulator have put Oesterreichische Volksbanken have put the country’s largest cooperative bank on a watchlist. A spokesman for the bank said it was not at risk of nationalization and that the press reports were inaccurate. Recently the US dollar has risen on positive US jobs and economic data. Camilla Sutton of the Bank of Nova Scotia 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.”

Dollar Gains on Industrial Production Data

The dollar gained 1% on the euro trading at $1.4513. The dollar gained 1.6% on the yen and traded at 89.95. The yen fell 0.4% against the euro to and fell 0.5% against the pound to 89.41 U.K. pence. US industrial production increased 0.8% in November but a report from New York showed decreased industrial production during the same period showing the US economy is still struggling. Sebastien Galy of BNP Paribas SA said, “The data was positive for the dollar. It’s much safer to be short the yen, not the dollar.”

Greek Fiscal Problems Add to Euro’s Woes

Risk sentiment rose after Abu Dhabi announces a $10 billion dollar bailout for Dubai erasing previous debt concerns. Greek fiscal problems continue adding to Austria’s banking woes and sparking concerns about Euro Zone recovery. Investors are watching the ongoing Federal Reserve meeting for signs that the Fed may withdraw its stimulus programs earlier than expected. The Fed’s low rates have pressured the greenback throughout 2009 and although the dollar is now higher against most major currencies the DXY is %% lower this year. Since the release of the last US non farm payrolls report investors have been speculating that the Fed may raise rates sooner than expected.

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.