Greenback Still Taking Advantage

Published March 29th, 2010 - 08:08 GMT

Greenback Still Taking Advantage
The debt issue in Greece and the summit held late last week in Brussels to find a solution for the turmoil were the main drivers for the foreign exchange markets for the past week. The US Dollar is benefiting from the situation, with investors and traders fleeing from all risky currencies and betting on the greenback as a safe haven for the time being. The Euro was the most affected currency. It started the week at 1.3530 and reached a low of 1.3268 following Portugal’s credit rating downgrade. The currency managed to recoup some of its losses on Friday to end the week at 1.3410 after the announcement of the Germano-Franc accord to support Greece if need be . The Sterling Pound also weakened last week, dragged by a strengthening US Dollar and all the uncertainty about the upcoming elections. The Pound reached a high of 1.5113 early last week, but broke afterwards to a low of 1.4800 and closed at 1.4897. The Japanese Yen has broken out of its recent range, rising above the February high of 92.15 rising to a high of 92.96, and closing the week at 92.52.
Bernanke Says Economy Still in Need for Help
Federal Reserve Chairman Ben Bernanke said last week that a modest US economic recovery still calls for the low interest rate environment imposed by the Fed, but the Central Bank stands ready to remove any stimulus plan once the recovery looks solid. Bernanke argued that the measures and the stimuli undertaken since the beginning of the crisis have helped improve conditions in the mortgage markets, which were at the center of the financial meltdown. Bernanke added that once the financial markets were healed, the Fed would aim to lower its outstanding credit to the banking system, which currently stands at $2.3 trillion, back to pre-crisis levels beneath $1 trillion.
Jobless Claims Drop Sharply
The number of Americans filing for initial unemployment insurance fell sharply last week, boosting hopes that the economy is on the verge of creating jobs. Initial claims for state unemployment benefits fell 14,000 to a seasonally adjusted 442,000. Even though the released report pointed to improvement in the battered labor market, recovery is likely to be too slow to make a huge progress in the country’s 9.7% unemployment rate, and will keep the pressure on president Obama for solutions.
GDP Revision
The US economy expanded at an annual rate of 5.6% in the fourth quarter of 2009, lower than the previously released figure of 5.9%. Nevertheless, the gain was the best in six years, as inventories, exports, consumption, and nonresidential fixed investment surged.
Europe
Safety Net Agreement for Greece
Following their meeting last week, Euro Zone leaders agreed to create a joint financial safety net, with the International Monetary Fund (IMF), to help the highly indebted Greece and to try to restore confidence in their common currency after weeks of negative sentiment. The joint Euro Zone and IMF bailout program comes with strict conditions, making no money available to Greece – or other financially troubled Euro Zone member – right now. The so-called accord states that the funds could be given only if the troubled country cannot raise funds from financial markets, and would require the unanimous agreement of the 16 countries. The agreement was a clear victory for German Chancellor Angela Merkel, who demanded that a rescue for Greece only come when the country runs out of other options. She also included that any support must include the IMF. Moreover, after objecting to a possible IMF intrusion on the euro-region economy, the European Central Bank endorsed the package, with president Trichet saying that European governments will remain in control of the process. The Greek Prime Minister was satisfied with the agreement reached, and stated that “Europe has taken a big step in the face of a big challenge”.
Portugal Credit Grade Lowered
Portugal’s credit grade was cut by the UK firm Fitch Ratings for the first time. The one-notch downgrade, from AA to AA-, underscored a growing concern about deteriorating public finances, and the fear that Europe’s weakest economies will struggle to meet their debt commitments as finances deteriorate. Furthermore, the ratings agency gave the country a negative outlook, adding that further economic or fiscal underperformance may lead to another downgrade. On the back of this announcement, the Euro extended its decline and reached a 10-month low against the US Dollar.
United Kingdom
Inflation Slowing Down
The United Kingdom’s Consumer Price Index (CPI) dropped more than what markets were expecting in February, as lower cost of items from consumer goods to energy weakened the price pressures in the economy. The CPI rose 3.0% from a year earlier, after an increase of 3.5% in January. Excluding the volatile components that are the food and energy prices, the so-called Core-CPI rose by 2.9%, after a 3.1% rise in January. With the prospect of fiscal tightening after an election due within weeks, the central bank still predicts that slack in the economy could drive inflation below the 2.0% goal.
Global
Dubai World Rescue
Dubai government announced last week that it will provide $9.5 billion in funding to help the troubled Dubai World conglomerate, which has presented a plan to restructure $23.5 billion in debt to its creditors, including converting $8.9 billion of government debt into equity. Dubai will get access to the $5.7 billion remaining from Abu Dhabi’s initial $10 billion and pay for the rest of the cash injection itself. The initial feedback on the proposal, which must now be approved by the conglomerate’s creditors, was positive. Moreover, credit default swaps linked to Dubai, showing the cost of insuring the debt in case of default, plunged after the announcement by 54 basis points to a level of around 370 basis points, the lowest since November.

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