Austrian Banking Woes

The steadily declining euro hit a 2 ½ low against the US dollar. Global stocks fell on European banking concerns and the fiscal condition of Greece which is widely viewed as the EU’s weakest member. To add to the Euro’s woes the Austrian press reported that the Austrian central bank and the country’s financial market regulator have put the country’s largest cooperative bank, Oesterreichische Volksbanken, on a watchlist. A spokesman for the bank said that the bank is not at risk of nationalization and that the watchlist reports were inaccurate. The report prompted concerns about the financial health of Europe’s banking system. Persistent concerns about Greece’s fiscal health have been pressuring the euro in currency markets. On Monday Greek Prime Minister George Papandreou announced spending cuts but investors remain unconvinced. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company stated, “Persistent concerns about sovereign risk in Europe such as those in Greece and softer stock markets are lending support to the dollar.”

Dollar Gains on Yen

On Tuesday the US dollar rallied broadly, especially against the yen, as strong inflation data prompted speculation that the Federal Reserve may end emergency support and stimulus programs sooner than expected. Such a move would likely lead to rate increases making the dollar more attractive to investors. On Monday better than expected data showed U.S. producer prices rose 1.8 percent. Michael Woolfolk of BNY Mellon said, “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.” A separate report on New York industrial production fell unexpectedly suggesting economic troubles remain.

Low Fed Rates Pressure Dollar

In 2009 the Fed policy of low rates has pressured the dollar throughout the year. Despite the fact that the dollar is now at a ten week high against other major currencies the dollar index has declined 5% during the year. Although the Fed has said rates would remain low markets are speculating that the withdrawal of emergency measures could signal tighter monetary policies and a possible rate hike.