Wednesday, December 29, 2010

FOREX-Dollar steadies vs euro; falls vs Aussie, yen

Wed Dec 29, 2010 6:39am EST

* Dollar steady vs euro, comes off lows as U.S. yields spike

* Swiss franc near record high; commodity currencies gain

* Dollar falls vs yen; trade thin, volatile

(Updates prices, changes byline, dateline; previous TOKYO)

By Jessica Mortimer

LONDON, Dec 29 (Reuters) - The dollar steadied against the euro on Wednesday as a spike in U.S. Treasury yields helped it recover from losses the previous day, while gains in commodity prices buoyed the likes of the Australian and Canadian dollars.

The market remained very thin, however, and susceptible to exaggerated moves after a yo-yo session the previous day which was marked by year-end flows and saw the dollar fall sharply against a range of currencies.

The turnaround came as U.S. Treasury yields rose across the board, with the benchmark 10-year issue gaining 16 basis points to just shy of 3.50 percent after a poor auction of five-year bonds. [US/]

The auction also served as a reminder of fiscal problems facing the United States. Coupled with concerns about a debt crisis in the euro zone, this buoyed the yen and kept the Swiss franc near record highs versus the dollar and euro as investors sought safety.

The dollar index, which tracks the greenback's performance against a basket of currencies, was slightly easier on the day at 80.276 .DXY, though it held above Tuesday's low of 79.596.

Weak U.S. consumer confidence and home price data on Tuesday, pointing to a fragile economy, [ID:nN28251373] weighed on the dollar and tempered its recovery.

"Cheaper U.S. Treasury prices make them more attractive but only to a point, and there could come a point when investors don't want to buy them any more," said Neil Mellor, currency strategist at Bank of New York Mellon.

He added that the greenback was soft against the yen as Japanese exporters have been selling on concerns about a weakening dollar, as well as against commodity-linked currencies, though he cautioned against reading too much into moves in such an illiquid market.

Investors will watch for a sale of seven-year U.S. debt on Wednesday.

The euro was steady on the day at $1.3123 EUR= after a whipsaw move on Tuesday that took it to $1.3275, its strongest since Dec. 17. It held above support at its 200-day moving average, now at $1.3084, and last week's low just above $1.3050.

Monday, December 27, 2010

Trichet Exit Looms as Sovereign Debt Woes Keep ECB Rate at 1%: Euro Credit

By Jana Randow and Simon Kennedy - Dec 24, 2010 8:00 AM GMT+0800

Jean-Claude Trichet will retire as European Central Bank president next October with the euro area still needing record-low interest rates, according to economists who accurately predicted the region’s monetary policy this year.

The Frankfurt-based central bank will keep its key interest rate unchanged throughout 2011 amid low inflation, moderate growth and persisting fallout from the sovereign-debt crisis, said 12 of 17 economists in a Bloomberg News survey. The sample was taken among forecasters who correctly anticipated in January that the ECB’s benchmark would stay this year at 1 percent.

The new year approaches with Trichet celebrating his 68th birthday this week after leading Europe’s response to the turmoil, which at one point threatened to destroy the single currency and has already engulfed Greece and Ireland. Even after those nations received international bailouts, the cost of insuring Greek debt rose yesterday to the highest in a month and investors speculate that Portugal may be next to require aid. The euro has fallen 8.7 percent against the dollar in 2010.

“Problems in the banking sector won’t be resolved quickly, and banks in peripheral countries will continue to need support,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “There won’t be any major inflation pressures that would warrant a rate increase before 2012.”

The 17 economists questioned this month participated in a similar survey of 61 forecasters in January on the outlook for ECB policy in 2010. The median forecast then was the benchmark would be at 1.5 percent now with Deutsche Bank AG and Bank of America Merrill Lynch analysts among those predicting 2 percent.

Buying Bonds

The ECB cut its rate to 1 percent in May 2009 to fight the worst recession in its history. A year later the central bank began buying government bonds for the first time to ease credit- market tensions as investors focused on outsized budget deficits. As recently as this month, the ECB was forced to delay a further withdrawal of unlimited liquidity support to euro-area banks.

Lingering questions on whether Portugal and Spain require external help will keep the ECB “patient, cautious and prudent” as it leaves its rate on hold through next year, said Cedric Thellier, an economist at Natixis in Paris. He says the region faces a sluggish recovery even as Germany’s strength offsets weakness in the so-called peripheral economies.

Portugal’s credit rating was downgraded yesterday by Fitch Ratings to A+ from AA-. The company predicted the nation will suffer a recession next year.

The ECB this month forecast growth will slow in 2011 to about 1.4 percent from this year’s 1.7 percent, while inflation will advance to 1.8 percent from 1.6 percent. That’s still under the bank’s target of just below 2 percent. The region will expand in size in January as Estonia becomes its 17th member.

Recession Prospects

David Owen, chief economist at Jefferies International Ltd. in London, said the ECB’s numbers imply the “weakest growth on record.” Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York, predicts the economy will “lapse into a deep recession, squeezed by a credit crunch and plagued by multiple bank failures.” Both forecasters expect no change in the main interest rate next year.

Adding to pressure on growth is the push to curb budget deficits to pacify investors. Portuguese 10-year bond yields rose by almost half a percentage point in the past two weeks. Those on similar Greek securities have returned to the 12 percent level they reached in May. The cost of insuring Greek debt jumped 38 basis points yesterday to 1,019, according to CMA prices for credit-default swaps.

Deficit Measures

Measures to restore order to budget deficits will amount to 1.3 percent of the euro zone’s gross domestic product in 2011, with Ireland and Portugal cutting back about 4 percent and Greece as much as 6 percent, according to Julian Callow, chief European economist at Barclays Capital. He also forecasts no rate change in 2011.

Analysts at UniCredit SpA, Royal Bank of Scotland Group Plc and Standard Chartered Plc are among five forecasters expecting the ECB to begin rate increases in the second half of 2011.

“The ECB will want to start re-establishing its anti- inflation credentials,” said Sarah Hewin, senior economist at Standard Chartered in London, whose forecast for a 1.75 percent rate was the highest of those surveyed. Jacques Cailloux, chief euro-area economist at RBS, expects an increase to 1.5 percent as strength in core economies such as Germany keep them “ring- fenced” from debt strains.

Surging bond yields prompted the ECB to step up bond purchases following Ireland’s aid package. The region’s central banks have bought 72.5 billion euros ($95 billion) of government debt since the bond program was announced in May. The ECB has also committed to aid banks with as much liquidity as needed through the first quarter for periods of up to three months.

Crisis Response

“The ECB made very clear that in their view the crisis needs to be resolved by governments,” said Ken Wattret, an economist at BNP Paribas SA in London and another forecaster who was right in 2010. “But governments aren’t very quick, so the ECB is going to feel continuously obliged to step in.”

Economists are divided over how long the ECB will take to return to its pre-crisis refinancing system of cash auctions. While Greet Vander Roost at KBC Asset Management in Brussels expects the exit to be finished by the end of the second quarter, Citigroup’s Michels says the ECB will keep supplying unlimited liquidity in weekly operations into 2012.

Michels’s scenario would turn responsibility for normalizing ECB monetary policy to the next president as Trichet’s central banking career comes to an end after almost two decades and eight years at the ECB. Who will replace him will be a subject of heated debate for leaders next year with Bundesbank President Axel Weber and Bank of Italy Governor Mario Draghi most often linked to the job.

“By next November it ought to be a lot clearer how the crisis is playing out,” said Callow of Barclays Capital. “The challenge for Trichet’s successor is to mold the euro area into a more cohesive economic and financial entity.”

ECB Rate at end of 2011

Analistas Financieras International 1 percent
Barclays Capital 1 percent
BHF-Bank AG 1.5 percent
BNP Paribas SA 1 percent
Capital Economics Ltd. 1 percent
Citigroup Inc. 1 percent
High Frequency Economics Ltd. 1 percent
Jefferies International Ltd. 1 percent
JPMorgan Chase & Co. 1 percent
KBC Asset Management 1 percent
Lloyds TSB Corporate Markets 1.25 percent
Natixis 1 percent
Royal Bank of Scotland Group Plc 1.5 percent
Standard Chartered Bank 1.75 percent
Societe Generale SA 1 percent
UniCredit Group 1.25 percent
Wermuth Asset Management GmbH 1 percent

Tuesday, December 21, 2010

Greece Faces `Heightened' Probability of Debt Rating Downgrade, Fitch Says

By Greg Chang and Anchalee Worrachate - Dec 21, 2010 10:51 AM PT

Greece may have its credit rating cut to non-investment grade by Fitch Ratings within six weeks after a review of the nation’s “fiscal sustainability.”

The assessment will focus on government measures to lower the budget deficit, the economic outlook and the “political will and capacity of the Greek state” to push through austerity measures, the company said in a statement today. Greece is rated BBB- at Fitch, its lowest investment-grade rating.

Fitch said it expects the review to be completed in January and there is a “heightened probability” of a downgrade.

Greece, the first euro-area nation to seek international aid this year, already has non-investment grade ratings at Moody’s Investors Service and Standard & Poor’s. The Greek bailout in May and subsequent aid for Ireland last month have so far failed to quell investors’ concerns that Europe’s debt crisis may spread to other nations.

“On the margin, this will further put pressure on peripheral spreads at the time when sovereign credit quality is a major concern,” said David Keeble, New York-based head of fixed-income strategy at Credit Agricole Corporate & Investment Bank. “But this is barely a surprise move. Fitch is the final guy to catch up. The market has moved way ahead.”

Moody’s has Greece on a Ba1 rating, while S&P has it on BB+. The extra yield investors charge to hold Greek 10-year debt over German bunds was at 898 basis points today, compared with a record of more than 965 basis points in May.

The so-called yield premium on Ireland’s debt, which rose to a euro-era high of 680 basis points on Nov. 30, was at 590 basis points today. Portugal was at 354 basis points.

Greece is cutting spending and raising taxes as a condition of its aid from the European Union and International Monetary Fund. The IMF said on Dec. 17 that the country’s rescue program has “continued to perform well” and it approved payment of another 2.5 billion euros ($3.3 billion) under the deal.

“The overall fiscal adjustment to date has been impressive,” the IMF said last week. “It is important that fiscal structural reforms be forcefully advanced to ensure a lasting consolidation.”

Friday, December 17, 2010

EU Leaders Create Debt-Management Mechanism From 2013

European Union leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 as they struggled to bridge divisions over immediate steps to stabilize bond markets.

A day after the European Central Bank armed itself with more capital to resist the crisis, the EU started to discuss measures such as offering shorter-term credits or using the bloc’s main rescue fund to buy bonds of distressed countries.

“My vision is of a Europe that grows ever closer together - - at different speeds in some cases, to be sure,” German Chancellor Angela Merkel told reporters after an EU summit in Brussels today.

For now, Germany ruled out topping up the current 750 billion-euro ($1 trillion) emergency fund or rushing aid to Portugal or Spain, reinforcing skepticism in markets about Europe’s search for the right formula to quell the fiscal contagion that threatens the euro.

The future setup “is to some extent window-dressing as it does not solve the current crisis,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013.”

The euro gained 0.1 percent to $1.3254 at 2:45 p.m. in Brussels, while bonds of Portugal, Spain, Greece and Ireland slipped. Moody’s Investors Service followed up warnings that it may cut the credit ratings of Spain and Greece by announcing today that it downgraded Ireland by five notches to Baa1 from Aa2, with a negative outlook.

Talks Under Way

Luxembourg Prime Minister Jean-Claude Juncker said deliberations are under way over more flexible use of the main 440 billion-euro component of the fund instead of waiting until the last minute to arrange all-or-nothing lifelines like the 85 billion-euro package granted to Ireland on Nov. 28.

Asked whether shorter-term credits or bond purchasing are up for debate, Juncker said measures being considered are “exactly those that you mentioned.”

Such steps would ease strains on the ECB, which has bought 72 billion euros of weaker countries’ debt since May to stabilize markets. Yesterday, the ECB shored up its capital base to guard against losses from the purchases, voting to almost double its capital to 10.76 billion euros.

“Let’s be candid,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on “Charlie Rose” on PBS. “The European Union needs a little more time, until maybe the beginning of next year, to be able to produce a comprehensive package.”

No ‘Speculation’

Driven by a German public outcry against propping up fiscally reckless countries, Merkel opposed putting more money on the table or further entwining Europe’s economies through joint bond sales. Merkel didn’t rule out more flexible use of the current fund, declining to enter into “speculation.”

In a departure from German insistence that each country determine its own fate, Merkel said today that maintaining national fiscal discipline won’t alone put the 16-nation euro region on a sounder footing.

Merkel and French President Nicolas Sarkozy indicated that closer coordination of business tax rates might come back onto the agenda as Europe tries to forge a more unified economy and fix flaws in the euro’s makeup.

In a jab at Ireland’s 12.5 percent corporate tax rate, Sarkozy said “I don’t think you can have the lowest corporate taxes in the euro zone and then transfer your debt.” Spanish Prime Minister Jose Luis Rodriguez Zapatero said the tax discussion is an “important novelty” that will play out over years.

‘Needs to Mature’

Italian Prime Minister Silvio Berlusconi put calls for joint euro-area borrowing in the same category, noting the German opposition “but that the proposal needs to mature. It will be studied more deeply.”

On the summit’s main business, Germany won an EU commitment for a treaty amendment to set up a crisis-resolution system in 2013 that would allow financial aid “if indispensable” to underpin the euro and might force bondholders to bear some of the costs of future rescues.

German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in Ireland’s support package and triggering concern that Portugal and Spain will be next.

While costs for bondholders aren’t mentioned in the two- sentence amendment agreed on last night, the leaders endorsed a Nov. 28 decision by finance ministers that writedowns may take place on a “case by case” basis in accord with IMF practices.

‘Useful Clarification’

ECB President Jean-Claude Trichet called the pledge not to mandate bond writeoffs a “useful clarification.”

Merkel needed the amendment to prevent German high-court challenges to the future aid mechanism, which the EU wants to get up and running when the current rescue package lapses in mid-2013.

The compromise text reads: “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”

Merkel didn’t get everything she wanted. Germany originally pushed to allow financial aid only as a “last resort,” language that might have ruled out contingency credit lines or given the IMF the lead in sorting out Europe’s economic woes.

Last overhauled a year ago, the treaty is the EU’s equivalent of a constitution, binding on EU institutions in Brussels and on national governments’ handling of European affairs. All 27 countries, including the 11 outside the euro region, must ratify the amendment.

European finance ministers plan to work out details of the future system by March so it can take effect in the middle of 2013.