UK Manufacturing Falls in January

The pound remained under pressure for the third straight day and is on track to hit its lowest level against the US dollar in ten months after a report showed that UK manufacturing contracted. UK manufacturing fell 0.9% in January, the first time in five months according to a report from the Office for National Statistics. Economists had predicted a gain of 0.2%. Concerns about the UK’s debt rating also pressured the pound. Jeremy Stretch of Rabobank International stated, “Sterling remains weak amid ongoing concerns over debt ratings and political dynamics. The production data may have been impacted by the bad weather in January, and this may play into the broader sterling negativity.”

UK to Devise Strategies to Maintain Extraordinary Measures

Prime Minister Gordon Brown said he will deliver this year’s budget statement on March 24th and said that the UK’s economic recovery is still ‘fragile.’ Chancellor of the Exchequer Alistair Darling said that the government will devise strategies to maintain extraordinary measures as long as recovery is fragile. Political problems have also affected the pound’s performance in currency markets. Support for the Conservatives has been dwindling. The conservatives believe more spending cuts are necessary to maintain the UK’s debt rating. Daragh Maher said in a report that, “It will be an interesting budget, having to strike a balance between doing enough to prevent a downgrade, but giving enough to try and get re-elected. An announcement of a general election should follow shortly thereafter.”

Fitch’s ratings service said the UK needs to reduce budget deficits to 3% of GDP by 2014-2015. A representative of the service said that the UK’s spending adjustments are moving at ‘too slow’ a pace. Investor concerns that the UK is lagging behind the US and other nations in exiting the global recession has made the pound the worst performer in currency markets this year. The uncertain political situation in the UK is putting further pressure on the already troubled pound. Parliamentary elections, which must be held by June could result in political gridlock if either party fails to gain a clear majority and could hamper efforts to deal with massive deficits.

Portuguese Bond Sale, Chinese Data Lifts Euro

Wednesday brought a rare piece of good news for the troubled euro. The euro gained on the US dollar and the yen as strong Chinese export data and a better than expected Portuguese bond sale lifted risk appetite among investors. Portugal, which had planned to sell EUR750 million in bonds, ended up selling EUR990 million worth of long term bonds. Some analysts expect the euro to remain under pressure until some EU nations implement further austerity measures.

Euro Gains vs. Dollar

The troubled euro has fallen for the third straight month vs. the US dollar as Greece’s debt crisis continues to threaten the multi nation currency. Last week the euro posted its first gain on the dollar in six weeks after a report said that Germany may purchase Greek bonds through a government lender. In February the euro fell 1.7% vs. the dollar and 3.2% vs. the yen. John Shin of Bank of America Merrill Lynch stated, “The Greek crisis has had a real macro impact in Europe. Growth forecasts have been pushed down and expectations for a rate hike by the ECB are on hold.” According to a Bloomberg survey of economists the European Central Bank is expected to keep its refinancing rates at 1% after the ECB’s policy meeting this week.

EU Pressures Greece For More Austerity Measures

Greek Economy Minister Louka Katseli said that Prime Minister George Papandreou will review Greece’s budget plans. A mission by the European Union to Greece found that the nation’s austerity measures are not enough to satisfy financial markets and that more measures are needed. Katseli told a television audience that, “If more measures are to be taken, they will be announced soon. The red line for everyone in this government is that the measures are effective, bringing additional revenues, and that they are socially just.” EU Economic Affairs Commissioner Olli Rehn will talk to the Athens government on Monday and markets are speculating that if Rehn’s talks are successful the EU may announce aid measures for Greece in exchange for further austerity measures. European Parliament Jorgo Chatzimarkakis of Germany said that Germany, France and the Netherlands would purchase Greek bonds through state owned financial institutions.

Merkel Says No Decision Made on Greek Aid

In a television interview German Chancellor Angela Merkel said that Greece has been “very courageous” in planning measures to address the nation’s budget deficit. Merkel repeated last weeks comments that the euro is facing its roughest period since the multi nation currency was launched in 1999. Many believe Merkel is trying to influence public opinion in a nation where opposition to Greek aid is high. Merkel said that no decision has been made for financial assistance to Greece and that the German government expected the Athens government to take whatever steps are necessary to resolve the crisis. Merkel stated, “There have been absolutely no other decisions taken. I would like to say that quite clearly. Greece has to do what’s necessary for Greece. But that is also important for all of us.”

Yen at One Year High vs. Euro

The Japanese yen has been a big winner during the recent flight to safe haven assets and currencies. The yen is now at a one year high against the troubled euro after news of a possible Greek downgrade sent investors and traders scurrying for safe haven. The Yen gained on all 16 major currencies after Standard & Poor’s and Moody’s Investors Service said that Greece’s rating could be downgraded as early as next month. Omer Esiner of Travelex Global Business Payments stated, “There’s a rush to cover short positions in yen when there’s a spike in economic uncertainty. “Sovereign credit concerns are keeping the markets in check. Higher- yielders are trading sharply lower.” The yen gained 1.5% vs. the euro trading at 120.24 per euro and against the US dollar the euro traded at $1.3525. The euro has fallen 2.5% against the dollar in February and is headed for a third monthly loss against the greenback.

Greek Debt Crisis Threatens EU

Greece’s debt problems continue to threaten the EU and the experts say that a bankruptcy in the euro zone could threaten the European Monetary Union. Carl Heinz Daube the head of Germany’s debt agency stated, “If one member were to go bankrupt this would mean, after 10 years, the euro experiment is at its end.” Daube also said that a euro zone nation bankruptcy would cause “a collapse of the whole system.” Despite widespread opposition to aid for Greece in Germany and the Netherlands the EU is expected to act if the integrity of the euro is threatened. Former ECB Chief Economist Otmar Issing said that giving aid to Greece would “open the flood gates” for other EU nations to seek financial assistance.

Bernanke Offers Sober Assessment of US Economy

On Wednesday Fed Chairman Ben Bernanke told the U.S. House of Representatives Financial Services Committee that a weak labor market and tame inflation require low interest rates for “an extended period.” Bernanke offered a sobering assessment of the US economy despite strong sign of growth. The US has lost over 8 million jobs since the recession began and Bernanke said that even though job losses are abating unemployment continues to plague American workers. Bernanke stated, “Notwithstanding the positive signs, the job market remains quite weak.” Bernanke said that the Federal Open Market Committee (FOMC) is prepared to support the US economy with emergency stimulus measures for the foreseeable future. Bernanke also told congress that “The FOMC continues to anticipate that economic conditions — including low rates of resource utilization, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Bernanke to Testify Before Congress

Investors will be watching Bernanke’s testimony in front of congress on Wednesday and Thursday. Investors and traders will be watching for any statements that could indicate a change in US monetary policies or any hint of early withdrawal of emergency stimulus measures. San Francisco Federal Reserve Bank President Janet Yellen said that the US economy still needs extraordinarily low interest rates to deal with “undesirably low” inflation. Tomohiro Nishida of Chuo Mitsui Trust and Banking stated, “The market will try to determine what the next move by the Fed is likely to be and is waiting to see if Bernanke will say something which was not in his written testimony earlier this month. Although Fed officials sought to stamp out the idea that the discount rate increase is a tightening of monetary policy, the move did give the impression the Fed had started to exit from loose monetary policy.” Despite the fact that Bernanke is likely to keep rates low most experts believe the Fed will be the first major central bank to raise rates.

Risk Aversion High

Doubts about the pace of global recover are still lingering driving investors towards safe haven currencies such as the US dollar and the Japanese yen. On Monday the low yielding yen was a big winner pushed higher by concern about the Greek debt crisis. Fabian Eliasson of Mizuho Corporate Bank Ltd. Stated, “People are not feeling optimistic on the economic outlook and the yen becomes the safer choice. It could be a one-off low mark but the stock market is suffering from this now.” On Monday the yen gained 1.1% against the dollar trading at 90.15 and the greenback gained 0.6% trading at $1.3519. The yen gained the most against most major currencies after a report that showed that US consumer confidence fell to a ten month low. Brian Dolan of Forex.com stated, “It’s an abysmal consumer confidence number and the risk trade is under pressure as a result. Treasuries are rallying, yields are falling and that pushes the yen higher.”

Markets Euro Negative

Euro sentiment remains negative among investors due to Greece’s debt crisis and a report by Munich-based Ifo institute showed that German business confidence fell in February, the first time in eleven months. Speaking about the euro negative tone in markets Alan Ruskin of Royal Bank of Scotland stated, “The euro tone is so negative that strong data is helpful for the dollar (via rates), and weaker data is seen as mild negative for the euro (because of risk appetite consideration).” This ‘heads you lose, tails you lose’ logic can be dangerous, but is symptomatic of the negative euro tone.”

Fed Hike, Risk Aversion Fuel Dollar Gains

The US dollar rose against most major currencies on news of the Fed rate hike. The Fed sent its clearest signal that emergency measures will be withdrawn. Fed Chairman Ben Bernanke and the Fed Board of Governors raised the rate charged to banks from 0.50% to 0.75%, the first increase since June 2006. The Fed said the decision was a “normalization” of lending and would not have any impact on US monetary policy. The Fed once again stated that rates would remain low for an ‘extended period.’ Despite the Fed statement investors increased bets that the Fed will tighten monetary policy sometime during the fourth quarter. Sung Won Sohn, an economics professor at California State University stated, “The discount rate historically has always been used as a psychological tool for signaling the future course of monetary policy. The bottom line is the Fed is signaling that in the future rates are more likely to go up, rather than stay stable or go down.”

Dollar at Nine Month High vs. Euro

The Fed rate for overnight borrowing between banks has been kept at 0 to 0.25% since 2008 and the Fed indicated that rates would remain low for the foreseeable future. Fed officials have warned banks to be prepared for increased borrowing costs and are keeping close tabs on economic conditions. Kelly King of BB&T Corp. said the Fed’s announcement was, basically a psychological message to the marketplace that at some point the Fed does have to begin to pay attention to the potential of inflation down the road. I don’t think they are going to be moving short-term rates anytime in the very near future.” The Fed announcement and the rise in risk aversion sent the dollar to a nine month high against the troubled euro. The greenback traded at $1.3517 vs. the euro and is headed for a sixth straight week of gains on the euro.

Greece Needs $70 Billion This Year

Most of the Euro’s troubles are blamed on Greece’s debt crisis which only seems to be getting worse. In Germany and the Netherlands public opinion polls show strong support for kicking Greece out of the EU. This week a supporter of German Chancellor Angela Merkel said that “not a single euro” should be spent to help Greece. The Athens government needs to raise 53 billion euros ($70 billion) this year. In May the Greek government is threatened by 16 billion euros of bond redemptions. Philip Wee of DBS Group Holdings Ltd. Stated, “With sovereign debt risks weighing on the euro-zone and Japan, the dollar appears to have the relative advantage over the euro and the yen.”