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Euro hesitates against dollar

Monday, April 4th, 2011

On Monday the euro hesitated against the dollar in an undecided market, after momentarily climbing to its highest level in five months, as investors anticipate an increase in rates by the European Central Bank (ECB) this week. The euro currency was worth 1.4219 dollars. It climbed in Asian trade to 1.4268, its highest level since November 4, before declining and then rising again. The euro steadied against the Japanese currency to 119.41 yen.

The ECB has hinted that it would use its next meeting on Thursday to raise its key rate to fight against the acceleration of inflation in the euro area. President Jean-Claude Trichet has indicated several times since early March a possible increase in April of the key rate which has been maintained at the very low level of 1% since May 2009, allowing the euro to advance significantly in recent weeks. It seems that market participants are already anticipating a 25 basis point rate by the ECB (an increase in rates makes a currency more attractive as more profitable).

The ECB press conference on Thursday is expected to generate considerable interest from investors, who scrutinize any sign that may indicate that the expected rate increase will mark the beginning of a cycle of tighter monetary policy in the euro area, with a second rate hike by summer. This perspective could instead reinforce concerns over the most indebted countries in the euro area, like Greece, Ireland and Portugal, while the latter is already groaning under very onerous debt markets and suffer from negative growth.

For its part the U.S. currency remained under pressure, despite the encouraging figures of the monthly report on employment in the United States on Friday. The president of the New York branch of the U.S. Federal Reserve said on Friday that the economic recovery in the U.S. remained fragile, with too high an unemployment rate, removing the likely prospect of a rate hike by the Fed. Investors will also monitor the decisions of monetary policy by the Bank of Australia and Bank of England, Tuesday and Thursday respectively, traders expecting a status quo from both institutions. The Australian dollar rose to 1.0417 U.S. dollar on Monday, its highest level since it has been decided to float the currency in 1983.

The British pound rose against the European single currency at 88.15 pence per euro, and against the greenback at 1.6131 dollar. The Swiss currency gained ground against the euro at 1.3116 Swiss francs to one euro, as against the greenback at 0.9225 Swiss francs to the dollar. One ounce of gold finished at 1435.50 dollars at tonight’s auction, also near its highest level. The Chinese currency has in turn yuan finished at 6.5450 per dollar.

The strong Yen

Monday, November 30th, 2009
Japanese Yen

Japanese Yen

The Japanese recently made a new high, reaching levels unseen since 1995.

As a country depending a lot on finished good exports (Japan has no natural resources to export) since after World War II, the strength or weakness of its currency is a matter of national concern. When the Americans ruled and reorganized Japan in 1945, they created today’s Japanese Yen with a conversion rate of 360 Yen for one dollar.

Last Friday the Nippon currency reached 86.58, a fourteen years low and a long way from the initial rate set by the American. And this is getting closer to making an all time high.

This is bad news for the country which has suffered from deflation for the past decade. This is likely to continue with a stronger Yen making all imports cheaper. This is also bad news for local investors. On one hand the Japanese stock market never likes a strong Yen; on the other hand all financial derivatives based on getting cheap Yen financing including carry trades will suffer from a stronger Yen.

This situation illustrates the eternal debate about the merit and benefit of using a floating currency for a trading country. Japan let its currency floating completely during financial deregulation in the 80’s under pressure from the American. But the Big Brother in the North, China, has not fallen to similar pressure. And their exports are booming but their currency is not that strong.

A large part of China’s recent economic success and rise to the top of commercial leagues can be attributed to the weakness of the Renminbi. The Chinese engineered a massive devaluation of their currency in the 80’s and even though the Yuan is nowadays pegged at 6,83 after its recent appreciation, it is still a long way from its value of 1,50 in 1980.

The bottom line is that the currency policies employed by Japan and China in the past twenty years have been opposite in many respects, helping the gap shrink between these two countries. This simple notion can explain tremendous wealth creation in the Middle Kingdom with simultaneous wealth erosion in the Land of the Rising Sun.

As the Japanese officials are starting to show signs of concern after the latest Yen appreciation, it is going to be interesting to watch this next episode in the saga of Asian currencies.