Weekly Money Market Review with IBQ: US dollar loses momentum as Cyprus situation improves

March 25, 2013 - 12:21:17 am

The US Dollar lost some momentum by the end of the week after recording the highest level in few months against the Euro, Pound and the Yen. Indeed, the looming FOMC meeting on March 20, the record level of the equity markets in the US and the better data coming from Asia, have turned global markets into a risk on mode, putting some weight on the US Dollar.  Globally, Australia posted much better than expected jobs number, Kuroda won a majority of votes in the upper house in the Japanese parliament and Norges bank decided to leave interest rates unchanged for longer than anticipated.

Stocks fell and Treasuries rose as the situation in Cyprus refueled concerns over the European debt crisis driving investors to seek out safe-haven currencies such as the greenback and the Japanese Yen. The US Dollar Index opened the week higher at 82.69, a big gap from its previous week’s close of 82.13. Additionally the US Dollar gained against a basket of currencies as a number of data pointed towards growing momentum in the economy during the first quarter, with jobless claims trending lower and factory activity and homes sales both on the rise.  

The Euro hovered near a four-month low dragged down by concerns about the Eurozone’s growth prospects as the ultimatum to Cyprus intensified the risk level in markets and increased investors’ uncertainty triggering the risk-off trade. The euro opened the week at 1.3074 and dropped dramatically to reach a low of 1.2843 mid-week. On Friday, the single currency gained momentum, as investors grew more optimistic that Cyprus would reach a deal to avert a meltdown and closed the week higher at 1.2990.

The Sterling Pound found some footing against the US Dollar as the Bank of England meeting minutes revealed that policy members voted 6-3 to keep the asset purchase program unchanged. Cable then traded in a volatile manner as Chancellor George Osborne, held his ground to the austerity plan in hand, as the British economy continues to stagnate. Mr. Osborne stated that government-spending cuts would continue for three more years after the 2015 elections.  The Pound opened the week at 1.5110, dropped to the low of 1.5025 at mid-week.  Cable closed the week at a 1.5234.

The Japanese Yen gained dramatically against the US dollar and Euro as fears of a financial meltdown in Cyprus spurred investors to sell riskier trades funded by the low-yielding Japanese currency. The dollar fell more than 1 percent against the Yen as comments from new Bank of Japan Governor Haruhiko Kuroda disappointed some investors who had expected stronger hints of aggressive monetary easing. The USD JPY closed the week at 94.50 and the EUR/JPY closed at 122.72.

Gold rose to a nearly one-month high, as safe-haven buying emerged after the European Union gave Cyprus an ultimatum to raise billions of Euros it needs to finalize a bailout or face a likely exit from the Euro zone. The Cyprus situation has ignited purchasing of gold from the public who are now becoming concerned that the crisis might spread to other Euro countries such as Spain and Italy. Spot gold rose to $1,616.36, its highest since Feb. 26. Gold fell as a deal between Greece and Cyprus eased fears of an escalating Euro zone debt crisis.

FOMC Meeting

The Federal Reserve’s policy meeting stated that its federal funds target rate remained at 0-0.25 percent and confirmed the continuation of its program to buy $85 billion of asset purchases. The Federal Open Market Committee “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the recovery strengthens.” The FOMC also reaffirmed that “the current exceptionally low level for federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5 percent,inflation between one and two years ahead is projected to be no more than a half percentage point higher than the committee’s 2 percent target.” Additionally, Fed officials took note of the economy’s brighter signs but also nodded to the headwinds from a tighter fiscal policy in Washington. They also dropped a reference from their last policy statement that had said global financial strains were easing.  

Jobless Claims 

The number of Americans filing new claims for jobless benefits edged higher last week, but a trend reading dropped to its lowest in five years and pointed to ongoing healing in the labor market. The Labour Department said initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 336,000, which was less than analysts had expected. The four-week moving average for new claims, a measure of labour market trends, fell 7,500 to 339,750, the lowest level since February 2008.

Housing Market Recovery on Track

New US home construction rose in February and building permits climbed to the highest level in almost five years, adding to signs of progress in the housing market that is helping boost the economy. Builders broke ground on 917,000 homes at an annual rate, up 0.8 percent from a revised 910,000 pace in January that was higher than initially estimated, the Commerce Department reported today in Washington. Building permits, a proxy for future construction, advanced 4.6 percent to 946,000, the strongest since June 2008. Confidence is being restored to the housing market as property values stabilize. Additionally, existing home sales increased 0.8 percent to an annual rate of 4.98 million units last month, the highest level since November 2009.


EU Gives Cyprus a Bailout Ultimatum

Cyprus became the fifth country to request a rescue from the EU. The request came after Greece’s debt restructuring, which undermined the financial health of lenders including Bank of Cyprus and Cyprus Popular Bank. On, Tuesday, the Cypriot parliament rejected a recent proposal by the 17 Euro-area finance ministers. The plan proposed involved an unprecedented levy on deposits below and above 100,000 by 6.75 percent and 9.9 percent respectively.

The Peninsula