Market Review – 27/09/2010 22:58 GMTEuro falls from a fresh five-month high on worries over European debt crisis
Euro dropped from a fresh 5-month high against dollar on Monday, as worries about fiscal debt problems in Europe curbed investors’ demand for the single currency.
Although the single currency edged lower in Asia after Friday’s rally to a 5-month high of 1.3496 on speculation that European banks would need more funds and dropped to 1.3425 in European morning after Moody’s downgraded the unguaranteed senior debt of Anglo Irish bank to BAA3 from A3 and maintained its review for downgrade, euro rebounded from there and rose to a fresh 5-month high of 1.3507 in NY morning, however, euro retreated on renewed worries about European debt crisis, as the Irish/German 10-year bond yield widened to 451 basis points, just below the record high of 454 basis points. Euro eventually dropped to 1.3435 ahead of NY closing.
The single currency was pressured in NY afternoon, as EU’s finance ministers agreed that more attention should be paid to the countries with high debt levels in the new EU budget rules. The new rules stated that excessive-deficit procedure would be applied if a country has its deficit below 3% of GDP but the debt is above 60% of GDP and debt reduction is too slow.
In other news, ECB chief Trichet spoke before the meeting of EU’s parliamentary committee that ‘incoming data have been better than expected since last hearing in June; expect recovery to proceed at moderate pace, positive underlying momentum; see continued uncertainty around outlook; inflation rate could increase slightly in short-term, it should remain moderate; risks to inflation are slightly to upside; current monetary policy stance is accommodative; interest rates are appropriate and support measure temporary in nature.’
Although the greenback ratcheted lower from 84.39 against the Japanese yen in Asia following Friday’s selloff to 84.12 and dropped to 84.11 in NY mid-day, buying interest at there lifted dollar to 84.35 in NY afternoon.
Earlier in Asia, Japanese deputy Finance Minister Sakurai said the Japanese government aimed to avoid issuing new bonds in compiling extra budget, its up to BOJ to decide its policy and increasing the purchase of JGB is one of the BOJ’s options. Sakurai added that BOJ had taken sufficient easing steps and there were limits to what Japan can do on its own, it would be better to consider Japan’s policy based on coming international meetings.
BOJ Governor Shirakawa spoke to a group of business leaders that ‘capping JGB purchases enables BOJ to conduct appropriate monetary adjustment; BOJ should be making use of JGB buying as ample fund supply method and JGB buying if seen as monetising debt would boost long-term rates.’
Although the British pound traded sideways in Asia after Friday’s rally to 1.5843 and fell to 1.5787 in European session on profit-taking, renewed buying interest emerged at there and cable rose to 1.5867 in tandem with euro in NY morning before retreating.
Earlier in Europe, U.K. MPC member Andrew Sentance said in the Times Newspaper that it was important to preserve MPC credibility on keeping inflation low. He also said embarking on a gradual tightening of policy would help reduce the shock of an abrupt rise in interest rates further down the line.
In addition, IMF said it endorsed the British coalition government’s tightening plan and there were balanced risks around its central view of moderate U.K. growth and gradually falling inflation. It also said that U.K. fiscal tightening would dampen short-term growth but it won’t stop the growth and would support a balanced recovery.
Economic data to be released on Tuesday include:
Germany Gfk index, CPI prelim, HICP prelim, U.K. GDP, Current account (gbp), CBI distribution trade, U.S. Consumer confidence.
