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.”
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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.”
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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.”
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More Action Needed to Restore Confidence in the Euro
The euro gained slightly against the US dollar on Monday buy is still close to multi month lows as Greek debt concerns continue to pressure the currency. Traders said the euro was helped by a slight rise in risk sentiment but do not believe the gain is sustainable. Investors were also disappointed that the G 7 nations did not issue any statements dealing with currencies during their weekend meeting. EU finance ministers said they would make sure Greece sticks to its budget cutting plans but investors say much more is needed to restore confidence in the euro. Threats by several Greek unions to strike if the budget cutting measures are implemented caused even more concerns among investors. Roberto Mialich of Unicredit in Milan stated, “If equities are in positive territory this will offer some cushion to euro/dollar downside, but it is not a great signal. 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.”
EU Debt Woes Spread
Investors and traders remain skeptical of EU assurances that Greece’s debt woes are under control. The group of 16 nations sharing a common currency is facing its biggest test after Greece’s massive deficits and public debt spread to Spain and Portugal. European Central Bank President Jean-Claude Trichet expressed confidence in the EU plan buy failed to convince investors. U.S. Treasury Secretary Timothy Geithner said that the EU finance ministers, “made clear to us they will manage this with great care.” Investors are concerned that massive financial help needed to prevent a Greek default would damage the recovery of financial markets. Michael Woolfolk of Bank of New York Mellon said, “What I think is needed is an agreement on behalf of the EU to provide further support for Greece to further ensure that it doesn’t default.”
US Budget Concerns
This week Greece will need to show investors that it can stick to plans to raise taxes and control public wages. The plan is expected to be challenged by civil service unions who will stage a 24 hour strike on Wednesday but the socialist government says it will stand firm. Outside of the Euro Zone concerns about US budget deficits have spiked concerns in financial and currency markets. The US is on track to run a budget deficit of 10.6% of Gross Domestic Product. The US government has spent heavily to address the financial crisis and rescue its economy.
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German Investor Confidence Falls
The euro fell against most major currencies on Tuesday pressured by persistent worries about Greece’s fiscal crisis, a rise in risk aversion and German data showed that German investor confidence fell more than expected. The decline in German investor sentiment pushed the euro to its lowest level vs. the US dollar so far this year. Dean Popplewell of OANDA, an FX brokerage in Toronto stated, “Sentiment has definitely soured based on what’s happening in Greece, and the fall in German confidence didn’t help. All we’ve seen is euro sellers across the board.” The dollar gained against most currencies due to a slide in risk sentiment among investors. The ZEW Center for European Economic Research said that the German index of investor and analyst expectations which is designed to predict economic developments six months in advance fell to 47.2, its fourth consecutive monthly decline.
Greek Crisis Affecting Other EU Nations
EU finance ministers said on Monday that Greece’s fiscal crisis is affecting other EU nations and called on the Athens government to ramp up its budget cutting measures. The Greek government now has a three year plan to bring the nation’s deficits within limits set by the EU. Moody’s Investors Service’s said that doubts about the Greek government’s ability to implement budget cutting measures prompted the ratings service3 to leave its outlook on Greece as negative. Sovereign debt risk in the EU has called the euro into question as a reserve currency. Greg Gibbs of RBS wrote in a report, “The problems in Greece will be much harder for the market to gloss over this year, and there is not a solution which appears good for the euro.”
Pound Gains on Cadbury Sale
The pound gained as much as 1% against the euro trading at 87.15 pence per euro the highest level since September 7, 2009. Consumer prices in the UK rose 2.9% in December from a year earlier the largest gain since 1997. The pound was also boosted by the announcement that Cadbury had accepted a 11.9 billion-pound ($19.7 billion USD) bid from US based Kraft Foods Inc.
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