Strathclyde Associates Foreign Exchange Markets October 2010

By Author: Strathclyde Associate
Total Articles: 2
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Strathclyde Associates Foreign Exchange Markets October 2010 Part 1: Uncertainty has remained the predominant feature
of the foreign exchange markets over the past month.
The sovereign debt crisis in Europe has clearly not
been resolved; and there has been further evidence
of the conflicting views of the central bankers about
the most appropriate measures to correct the current
problems, with the Fed primarily interested in
maintaining the momentum in the US economy, and
the European Central Bank and the Bank of England
more anxious to tighten fiscal policy to reduce the
size of outstanding fiscal deficits.
This general uncertainty produced a further fall in
the dollar in the early part of the month, and ahead
of the recent meeting of the Fed’s Open Market
Committee, in the expectation that there would a
further easing of monetary policy; and then a
subsequent recovery after policy was left basically
unchanged, to leave the dollar slightly higher over
the month.

The euro has weakened because of renewed fears
...
... about debt defaults; sterling has moved slightly higher
as the markets have continued to react favourably
to the proposed measures to reduce the UK huge
fiscal deficit; and there has been a continuing rally
in the yen because of its enhanced “safe haven”
status. But the movements in the markets have been
relatively small, as both traders and investors have
awaited guidance about future prospects.

Strathclyde Associates Foreign Exchange Markets October 2010 Part 1: The euro remains under pressures because of the
threat of debt defaults, and a possible break-up of
the single currency system; sterling has been helped
by the early actions of the new coalition government,
but there are doubts about whether it will survive,
and whether it can implement the proposed austerity
measures even if it does survive; the strength of the
yen is clearly unwelcome to the Japanese authorities,
and has increased the risk that the Bank of Japan
will intervene in the markets to try to reverse the
trend; and China has provoked considerable criticism,
especially in the US, by its latest actions to depress
the value of the renmimbi. In this situation, although
forecasts are extremely difficult, we still believe that
the dollar will “muddle through”, and that this will hold
the currency system together.
In the statement; after the latest meeting of the Fed’s
Open Market Committee. The bank downgraded its
view of economic prospects, indicating that “the pace
of recovery in output and employment has slowed in
recent months”, and was likely to be “more modest”
than anticipated in the near-term.

It would therefore “continue to monitor the economic
outlook and financial developments, and will employ
its policy tools as necessary to promote economic
recovery with price stability”.

But at the meeting it made no major policy changes,
and only agreed to begin reinvesting the proceeds
from maturing mortgage-backed and agency securities
that it had previously acquired into Treasury securities
to ensure that there was no tightening of monetary
policy. But it is clear that its main priority in maintaining
the momentum in the economy, and therefore further
stimulatory measures are likely if the economic
situation continues to deteriorate.

And the same priority exists in the conduct of fiscal
policy Congress has shown some reluctance to
sanction new spending programmes requested by
President Obama; but it has recently voted to inject
an additional $26 billion into the economy, transferring
funds to cash-strapped states to avoid further jobs
cuts in the public sector, and despite the massive
size of the existing fiscal deficit. Its priorities are
therefore also clear.

After rallying fairly strongly recently, the euro has
fallen back over the past month. The improvement
in the dollar after the Fed’s Open Market Committee
meeting has been an important factor;
But there have also been renewed concerns about
sovereign debt defaults in Europe, and the viability
of the single currency system, and this appears to
have led to some withdrawal of capital funds from
the European markets.

The latest available evidence on the performance of
the euro-zone economy has been encouraging.