Posts Tagged ‘Federal Reserve’

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.

Is Quantitative Easing working?

Sunday, August 30th, 2009

The US Government has embarked in unfamiliar territory in order to end the financial crisis: quantitative easing.

“Easing” just stands for making life easy for the banks, and indirectly for everyone, from an economic standpoint. “Quantitative” stands for quantity.

Ok, let us stop the bullshit for a minute. I find that one of the miracles of this new millennium is that a new widespread trend has emerged. The skill to rename old things with new names so that they seem to be completely novel and modern technologies, whereas there are simply rehashed old techniques. So to put it in plain English, quantitative easing simply means to print money.

This is certainly not new, and monarchs and emperors have used it since ancient time, any time they lacked the means to conduct the policies they wished to follow. Remember that Napoleon sold Louisiana (which was about one third of the United States by then) for a meager twenty million. So at least he had something to sell to finance his wars.

Earlier French Kings who did not have this luxury would routinely burn their Jewish bankers in the public square in order to cancel the royal debts and to get free assets in the process. Even earlier, since Antiquity the Royal Mint was the ideal medium to secretly change the composition of coins, hence creating many new coins from fewer old ones. When note bills became in use, it was much easier (literally and figuratively), as Government just had to go to the printing machine to get money.

Technically it is done differently nowadays thanks to the use of the digital money market and of sophisticated Central Bank operations. It is all a matter of orchestrating complicated monetary transactions through computers, networks and data center. Money is simply equivalent to how some bits are organized on some magnetic disks at some obscure data center.

Joke aside, financial markets have recovered nicely all over the World, not in small part because of the quantitative easing engineered from the United States. So far it seems to work.

Even though many non-believers doubt that this policy can work in the long term, it is clear that the recent economic maelstrom has lost is intensity and that a gentle global recovery is under way.

Following the Asian crisis in the late 1990s, a similar policy of quantitative easing was conducted by the Japanese Central Bank until 2006, adopting a zero interest rate policy, expanding banks’ balance sheets and purchasing long-term bonds. But this stimulus failed to materialize into any visible economic benefit, as banks continued to refuse to lend money even though that where overwhelmed with it.

This is what Keynes calls the liquidity trap, i.e. when interest rates are near zero, no more impetus can be gained from such monetary policy because interest rate cannot go below zero (usually). Fortunately the American and Japanese economies and cultures are radically different, so there is no need to believe that what occurred in the Land of the Rising Sun will repeat in America.

In particular their size and global economic importance differ, and one is a major exporting country whereas the other a major importing country. Also the US Government has adopted a wider policy than their Japanese counterparts.

It seems to work for now, but it is too early to tell the long-term consequence of financial easing in the USA. As his leading advocate, it is certainly one of the main arguments on how president Obama will be judged in the history books.