Mounting Deficit Concerns
The US dollar fell against the yen and pared earlier losses vs. the euro as concerns about mounting government deficits reduced risk sentiment in markets. The pound weakened after UK Chancellor of the Exchequer Alistair Darling told British lawmakers that deficits in the UK will run about 611 billion pounds ($990 billion USD) during the next four years. Darling also said the UK economy would contract 4.75% this year, worse than previous estimates of 3.75% and 3.25%. Ian Stannard of BNP Paribas SA stated, “Sterling still looks vulnerable. There are no real measures here to start to tackle concerns that financial markets and investors are likely to have.” The pound fell for the fifth straight day and traded at $1.6233. Moody’s Investors Service said that both the UK’s and US ratings may “test the Aaa boundaries” due to massive deficits and deteriorating public finances. In 2010 UK debt will account for 89.3% of GDP.
Greek and Spanish Rating Concerns
On Tuesday the dollar hit a one month high vs. the euro after Fitch dropped Greece’s rating from A- to BBB+. Investors became concerned after Standard & Poor’s revised its outlook on Spain to negative. Matthew Strauss of RBC Capital Markets in Toronto said, “There are some increased concerns about sovereign ratings, though investors are also using it as an excuse to take profits and exit some trades by year-end.” Strauss also said that while the economic problems of Spain and Greece are well known any sign of credit problems from another part of the world could fuel greater risk aversion among investors.
US Rates to Remain Low
On Tuesday the dollar fell after remarks by Fed Chairman Bernanke who said that Fed rates would remain low for an extended period dousing speculation that the Fed would raise rates after last Friday’s better than expected US jobs report. Friday’s jobs report had led many investors to bet that the fed would raise rates sooner than mid 2010.
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Dollar at One Month High vs. Euro
On Tuesday (Dec.8th) the dollar rose to an almost one high against the euro as US stocks fell putting a damper on risk sentiment. The euro was also pressured by Fitch’s downgrade of Greece’s credit rating and German data that showed that German industrial output fell 1.8% in October. Lingering concerns about Dubai’s financial situation also spurred demand for safe haven assets. The Fitch data followed a Standard and Poor’s report that said that Greek banks are Europe’s riskiest. 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.”
Dollar Posts Gains on Last Week’s Jobs Data
On December 4th the US dollar posted its largest gains since June as the US non farm payrolls report showed that US employers cut fewer jobs since the recession started. Vassili Serebriakov of Wells Fargo & Co. said, “We’ve seen this equity-dollar correlation reinstalled. The key to breaking the correlation is consistently improving U.S. data shifting interest-rate expectations, and outside of payrolls we haven’t really seen that.” The US dollar and stocks have generally traded in opposite directions since the global recession began.
Bernanke Sees ‘Extended Period’ of Low Rates
On Monday the dollar was pressured by remarks made by Federal Reserve Chairman Ben Bernanke who said that the US economy is ‘fragile’ and that the Fed is not likely to raise rates anytime soon. Bernanke said that while the US economy has improved the jobless rate may remain elevated for some time. Bernanke said he sees an ‘extended period’ of low Fed rates dampening speculation that the Fed will raise rates on last week’s jobs data. Brian Dolan of Forex .Com said, “Bernanke is emphasizing the weakness and the downside to the U.S. economy. Therefore, he’s postponing interest rate hike expectations. He left a very clear impression that rates will remain on hold.”
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Better Than Expected Job Data
The US dollar rose after non farm payrolls prompted investors to speculate that the Federal Reserve may raise rates sooner than expected. The Fed had said that it would keep rates low for an ‘extended period’ into 2010. The Japanese yen declined on speculation that it would once more be the chief vehicle for funding carry trades. The Canadian dollar affectionately called the ‘loonie’ rose as Canada added five times as many jobs as forecast. Marc Chandler of Brown Brothers Harriman & Co. told Bloomberg News, “This is a good number. High-yielding currencies are doing well, Poland is doing well in Eastern Europe. Across the board, risk-on trades are back on after much- better-than-expected jobs data.”
Finance Chief Says Euro ‘Overvalued’
Against the yen the dollar rose 1.8% to 89.88, up from 88.26 yesterday. The dollar gained 1.1% on the euro trading at $1.4885. US employers shed 11,000 jobs in November much less than the 130,000 that had been predicted. Jean-Claude Juncker who is the head of a group of Euro Zone finance ministers said the euro was ‘overvalued’ against the greenback and the Chinese Yuan. At a press conference in Luxembourg he said, “We urged the Chinese to let the Yuan appreciate versus the euro because in the long term, it’s not possible that the economy, which grows at the fastest pace in the world at the moment, constantly depreciates. We want to change this situation as fast as possible.”
ECB To Withdraw Stimulus Measures
European Central Bank President Jean Claude Trichet told reporters in Frankfurt that the ECB will withdraw stimulus measures and said the need for such measures had diminished. Japan’s Vice Finance Minister Rintaro Tamaki met with US Treasury officials prompting speculation that Japan and the US are discussing ways to cap the yen. Japanese Deputy Prime Minister Naoto Kan stated, “It would be good for the yen to weaken a little more.” The strong yen has been hurting major Japanese exporters such as Toyota and Sony.
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ADP Posts US Job Losses
The US dollar climbed after US jobs data compiled by ADP Employer Services showed that the US lost 169,000 private sector jobs in November, higher than predictions of 155,000. The euro fell as investors waited for the results of the ECB meeting which is expected to withdraw stimulus programs and upgrade 2010 economic forecasts. Also due this week are US non farm payroll reports. Brian Dolan of Forex.com said, “Overall ADP is worse than expected, so it could be a negative for risk appetite. But I have to think that with the ECB tomorrow and U.S. payrolls on Friday we’re not going to be going very far today.”
BOJ Fights Deflation
Measures by the Bank of Japan to fight deflation and keep short term rates low spurred investors to take profits on the yen. Marcus Hettinger of Credit Suisse stated, “We had very strong yen appreciation (recently), and now there’s some retracement. Risk appetite is a little bit stronger than it was last week when we had the Dubai news, so investors are taking profits. The BOJ didn’t really do anything major, but the risk is higher now of intervention.” Some analysts believe that the BOJ’s decisions this week indicated that the central bank is willing to ease monetary policy further if needed. The BOJ said it would provide 10 trillion yen ($115 billion USD) in three month funds at a rate of 0.1%.
More BOJ Actions Expected
The Japanese government is expected to provide an economic stimulus package designed to bolster the troubled Japanese economy. Masafumi Yamamoto of Barclays Capital said, “The focus now shifts to the government and the size of the supplementary budget and whether there will be any action by the Ministry of Finance in the foreign exchange market.” In addition to the ECB meeting investors will also be waiting for Friday’s non farm payrolls report from the US.
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