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Weekly Money Market Review with IBQ: Dollar strengthens against major counterparts

February 24, 2014



The US dollar strengthened against most major counterparts as the Federal Reserve of the United States signalled that they will continue to taper their bond purchases in every meeting. The dollar gained further against the euro and the Japanese yen, as the euro suffers from worse than expected numbers in France and Germany, and with the Bank of Japan stating that they will continue its monetary easing policy.

The euro started the week at 1.3693, gaining gradually during the week, as speculation in the US over the Federal Reserves' decision fuelled uncertainty. The single currency continued to gain as German Finance Minister, Wolfgang Schaeuble, stated that Germany is to raise efforts for bilateral Greek aid. The euro touched a high of 1.3773, and then dropped to break the previous lows, as manufacturing and production data from Germany and France disappoint, touching a low of 1.3686. The single currency ended the week at 1.3746.

The Sterling Pound fell over 200 basis points against the dollar during the week. The Pound opened at 1.6747, hiking only slightly to a 4-year high of 1.6823, until orders were triggered which pushed the Pound lower. The drop continued amid concerns that the economic recovery will slow, as retail sales showed a downward forecast. The Pound continued to fall with bad economic data, to touch a low of 1.6613. The GBP closed the week at 1.6616.

The Japanese yen was one of the biggest losers last week, as it weakened more than 100 basis points against the dollar. The currency opened the week at 101.80, gaining against the dollar on Monday to touch a high of 101.39. The Japanese yen then fell as the Bank of Japan iterated that they would continue their monetary easing policy until the inflation rate stabilises at two percent. The yen closed at 102.51.

The Aussie dollar opened the week at 0.9034, only to gradually weaken against a stronger US dollar. The currency dropped to its lowest level to 0.8937. The Aussie regained some of its losses as the Reserve Bank of Australia stated that "there were further signs that the easing policy and the weaker currency are having an impact" signalling that the central bank might take action to halt the drop of the Aussie. The Central bank indicated in their last meeting of a "period of stability in interest rates". The AUD closed the week at 0.8977.

The Federal Reserve, chaired by the newly appointed Janet Yellen, drifted away from their year-old commitment of raising the interest rates when unemployment drops below the 6.5 percent mark. As joblessness is dropping faster than expected, policy makers have decided to alter their guidance over the longevity of the low interest rates. The meeting minutes showed that several policy makers said that "the absence of an appreciable change in the economic outlook, there should be a clear presumption in favour" of continuing the quantitative easing tapering by $10bn a month. Speculation and volatility hiked, as the decision to hike rates is under question, with the unemployment rate dropping to the lowest in more than 5-years.

The Federal Reserve Bank of Philadelphia's Business Outlook index plunges to a one-year low this month, fuelling concerns over the US economic outlook. The Philly Fed Index fell to -6.3, dropping below the 0.0 mark for the first time in 8-months. The severe drop in manufacturing was attributed to the severe winter weather that affected the region during the survey period. The index came much lower than January's figure of 9.4, taking the market by surprise as expectations were set to 9.2, only a 0.2 drop.

Fewer Americans filed applications for unemployment benefits last week, indicating that US employers are hanging on to their workers, even with a slowdown in in manufacturing and housing due to the cold weather. Jobless claims dropped by 3,000 to 336,000, only 1,000 shy of the expected figure of 335,000. The slowdown in dismissals could lay the groundwork for a pickup in hiring, which will equate to a boost in consumer spending, as most retailers prepare to launch summer clothing and equipment.

Eurozone manufacturing production unexpectedly dropped to 54.7, from 56.5 in January. The Manufacturing production index slipped more than the expected 56.3. While the Euro-area economy is forecasted to post full year growth in 2014 for the first time in 3-years, the recovery remains at risk because of near-record unemployment and subdued price pressures.

German investor confidence fell in February for a second consecutive month, a sign that the recovery in neighbouring countries is not strong enough, and pose a risk to the continents' powerhouse. The ZEW investor Confidence index slid more than the forecasted 61.5, to 55.7, from 61.7 the previous month. While German economic growth in the fourth quarter exceeded estimates, investors are still cautious about the rest of the Euro area, the country's biggest trading partner.

The United Kingdoms' unemployment rate unexpectedly rose in the fourth quarter last year, indicating that the recent improvement in the labour market has lost its momentum. The jobless rate rose to 7.2 percent, the first increase since February 2013, from 7.1 percent the previous quarter. On the other hand, during the month of January, jobless claims fell by 27,600, exceeding economists' forecasts. Moreover, the Bank of England has abandoned its commitment of raising the interest rates if the unemployment rate drops below 7%, after the economy grew faster than expected when forward guidance was introduced.

UK retail sales fell in January, exceeding economists' forecasts, with the biggest drop in almost two years, as clothing stores and food shops saw lower demand by Britons. Sales plunged -1.5 percent from December, after they have surged by 2.5 percent from the previous month. It was the biggest drop since April 2012. The drop highlights the risks to the British economic recovery, as January is a critical month for retailers as they clear winter stocks with seasonal discounts.  The Peninsula


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Source: Peninsula, The (Qatar)


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