US Dollar:
The Dollar was down again against Sterling this morning but rose against the Euro as comments from the European Central Bank put serious pressure on the single currency against the other majors. Worse than expected U.S economic data on Friday, scuppering investors’ expectations of a U.S rate increase, is still looked at as the contributing factor on recent pressure to the greenback, with recent positive investor sentiment in the U.K and now dovish comments in Europe helping the Euro allowing the uncertain Dollar to be swayed by market conditions outside of the U.S. Investors belief in a U.S rate increase in the near future is being seriously tested.”It does look like that the market has pushed out even further the timing of when the Fed hikes rates,” said Meg Browne, senior currency strategist at Brown Brothers and Harriman in New York. “That’s positive for foreign currencies because it means U.S. rates will remain low for a longer period.” Retail Sales in the U.S were worse than expected overnight, dropping by 0.3% in December, putting more pressure on USD against Sterling, with events in Europe preventing any losses against the Euro. GBP/USD 1.6317, EUR/USD 1.4410.
Pound:
Sterling has continued it’s recent gains this morning particularly against the Euro, breaking the psychological 1.13 level and continuing to hold above 1.63 Vs the USD. The market has clearly been focused on the ECB interest rate announcement yesterday and Jean-Claude Trichet’s comments made in the press conference. Trichet helped lift the pound higher against the Euro by confirming that fiscally-stressed Greece (government finances) would receive no special treatment as it struggles with massive deficits. The German chancellor Merkel also said that the Euro “a difficult phase” because of high fiscal deficits in Greece and some other euro-zone countries (Ireland, Spain) and to make matters worse rumours have been circulating around the markets that Merkel herself is to resign as chancellor of Germany (the power-house of Europe) A German government spokesman has denied these rumours. Whilst the focus is away from sterling at the moment, next week’s economic data could put the pound under renewed pressure once again after the release of key inflation, employment and public sector borrowing data. Now may therefore provide a good time to buy the Euro ahead of next week’s crucial period for sterling.
Euro:
The Euro was down against Sterling, Dollar and across the board as European Central Bank President Jean-Claude Trichet made dovish comments saying Greece would ‘receive no special treatment’ as it struggles with massive deficits. He also wouldn’t rule out setbacks to Euro zone growth in coming months, while in Germany Chancellor Angela Merkel said the Euro faced a ‘difficult phase’ because of high fiscal deficits in Greece and some other Euro zone countries. The comments were enough to convince major players to sell the Euro against other major currencies this morning, putting pressure on the single currency. Tokyo traders cited a series of fundamental factors as causing the Euro’s slump, such as risk aversion due to weak U.S. economic data and commodity prices, credit concern due to ECB President Jean-Claude Trichet’s overnight remarks on Greece, and a rumour that German Chancellor Angela Merkel may resign. All these factors were used as excuses for short-term hedge funds to reduce Euro holdings, dealers said. “There are many issues you can blame for the Euro’s weakness today, but the bottom line is that investors’ Euro holdings are too big in light of the pace of the global economic recovery,” said Hideaki Inoue, a deputy general manager of Mitsubishi UFJ Trust and Banking Corp. Looking ahead, if more encouraging Euro zone data is combined with hawkish comments on the state of the Euro zone economy we could see some correction to these current levels. GBP/EUR 1.1317, EUR/USD 1.4410.
Quote of the Day
“Age is something that doesn’t matter, unless you are a cheese.” – Billie Burke
January 15th, 2010 at 5:42 pm
I find your internet blog fascinating. But I have a query. I understand why sentiment about a currency will be influenced by news such as national, economic statistics, political instability, etc. However, I don’t understand why exchange rates are so vulnerable in the short term to such news. How do changes in sentiment quickly translate into rate changes? What kinds of people/companies are buying/selling currencies in light of ‘economic news’ in such large quantities that their transactions impact on exchange rates? Why are they selling/buying currencies in response to daily news about national economies?
When the € gained rapidly against the $ and the £ around two years ago, I was baffled. With the exception of Germany, most Euroland economies are structurally flawed, uncompetitive, over-taxed and burdened by excessive government expenditure. Southern European cultures are plagued by corruption and weak political accountability. Even in France, the notion of political accountability is alien to the national psyche. Writing a complaint to a French Government minister is an utter waste of time because no answer will ever be forthcoming. Asking to examine the accounts of a town council will provoke astonishment that a taxpayer could even think of making such a silly request. Posing the same question to two different ‘fonctionnaires’ will usually obtain contradictory answers. Each answer will most likely reflect the ‘fonctionnaire’s’ desire to demonstrate power and control and avoid any further questions. Policeman carry guns and are officially anonymous. The idea of a Policeman wearing a badge with a number so that he can be cited in a complaint is totally alien.
Of course, in the UK, if you write to a Government minister you will receive a reply. Most often, it will be a vacuous, meaningless and insincere reply. But if you write to a UK civil servant or to a UK company, you will usually receive a considerate and considered reply. If you write to a French company and a reply is forthcoming, it will leave you in no doubt that you are a misguided soul and no further correspondence will be entertained.
Why are these things important to a nation’s economy? Because they highlight a lack of national unity of purpose and an environment in which politicians and the authorities are at constant war with their citizens. They illustrate a pervasive culture of deception and distrust at all levels and a common view that the main assessment criterion for the viability/desirability of a potential course of action is whether one is likely to get away with it. Ultimately, no national economy can survive without trade. Would you want to trade with someone who is used to operating in such a culture?
If the US and UK economies were not in such dire trouble, the € would look a very dodgy prospect. The ECB is the only bank in charge of a currency, but answerable to no national government. The vast majority of ‘patrons’ of small businesses in France evade tax – because paying the taxes they are supposed to pay renders most small businesses non-viable. The classic pattern is for a small business to open and survive for three years because of eligibility for tax breaks. Then, as soon as the business has to pay the full tax rates, it closes.
The € is a currency that represents a cocktail of incompatible national economies, many of which belong to nations that revel in being philosophically opposed to the Anglo-Saxon version of capitalism. The last 10 years confirm that, in unregulated form, that version of capitalism is broken and discredited. But taxing income AND wealth acquired as a result of that income (just because it exists)and financially punishing the self-employed to pay for armies of under-employed civil servants is not a better model.
The question is not whether the reality of Euroland’s economies will one day dawn on the rest of the world, the question is when the reality check will occur. When that reality check occurs, I predict a major run on the €.