In the last 48 hours the situation on the world’s foreign exchange markets has almost reversed.
On Monday the US dollar was being treated as a safe haven currency given continuing concerns about indebted nations on the EMU periphery. Bond yields were increasing not only for potentially insolvent nations such as Portugal and Spain but Germany too.
On Tuesday however US President Barack Obama made the unexpected announcement that he has agreed a $1 trillion stimulus package with Republications. This includes extending Bush-era tax cuts of $700 billion for people earning more than $250,000 and withholding a 2% cut in Social Security until 2012. The markets interpreted this as an attempt to speed up the US economic recovery.
Yet this proposal adds substantially to the US deficit, and President Obama hasn’t announced how he plans to recoup these costs. Hence since Tuesday the markets have become deeply concerned that President Obama isn’t taking the necessary steps to combat the US debt – expected to reach 110% GDP in 2012.
This concern has so far negatively affected US bond yields, which yesterday rose 3.3%. The USDEUR exchange rate meanwhile remains favourable to the US dollar: this morning the dollar has risen almost a third of a percentage against the euro for instance.
This might however change in the future. President Obama’s decision to increase fiscal stimulus sets the US in obvious contrast to the EMU where nations such as Ireland have opted for fiscal austerity. If either approach begins to yield obvious benefits then this could give the euro or US dollar an obvious advantage over the other on the currency exchange markets.
In the UK meanwhile the Bank of England’s latest interest rate decision is announced at 12noon today. Economic commentators widely expect no change to be announced meaning the decision has had little impact on the value of sterling this morning. Sterling though continues to benefit from currency exchange market uncertainty about the EMU.
Other important announcements today include the latest unemployment figures from Australia. These are expected to remain low compared to most industrialised nations (mostly because Australia did not experience recession in 2008.) In addition today the German price consumer index figures for November are released, measuring the price change in German goods and services.
By Peter Lavelle with foreign currency exchange specialists Pure FX.