Japan follows China in backing of Eurozone

Tom Tong11/Jan/2011Currency Updates

GBP

Sterling struck a four-month high against the euro as jitters over European debt intensified, but remained fairly range bound against the USD. Sterling performed well against the euro yesterday as the resurgence of sovereign debt concerns, anchored in Portugal and Belgium, meant the pound touched a four month high against the single currency. The UK currency, however, slipped against the dollar as disappointing housing data unnerved investors after the initial optimism. Figures from mortgage lender Halifax said house prices in the UK dropped 1.6% year-on-year in the three months to December.

In the UK all eyes are on the MPC interest rate decision on Thursday, with no change expected, but investors keen to see if there is any change in rhetoric from policy makers due to the inflation levels still hovering over 3% and the VAT cuts coming into effect.

USD

Despite the poor unemployment data coming out of the US on Friday, one positive for the US economy was the news that Fed has made an $81 billion dollar profit for the US treasury. The US Federal Reserve reported that profits had jumped by more than 50 percent due to sizeable interest rate payments on its various lending programmes. This news comes as Bernanke gave no sign, when in testimony to Congress last week, that the US bond purchase scheme was going to be scaled back any time soon.

The general tone in the US at present is fairly positive as the recovery continues to broaden, with ISM readings and the employment report indicating that the service sector is now the driving force behind the recovery.

EUR

The single currency remained under pressure yesterday as fears of contagion continued and speculation was rife that Portugal would be the third country to receive a bail out. The market is keenly anticipating Portugal’s sale of long term debt tomorrow to gauge investor confidence. The euro fell to a four-month low against sterling but rose off a similar low against the USD. Political gridlock in Belgium added to the Eurozone’s woes as yields on ten year Belgian debt also soared. This prompted the Belgian Premier to pressure the government to draft a tighter, more austere budget for 2011.

One small positive for the euro was the news that Japan intends to mirror China’s pledge to buy Eurozone bonds in a bid to support the European Financial Stability Fund. Finance Minister Yoshihiko Noda told reporters after a cabinet meeting on Tuesday that Tokyo was considering buying about 20 percent of Eurozone bonds to be jointly issued later this month to raise funds to support Ireland. Elsewhere, China declared support for Spain, again providing some longer term support for the beleaguered Eurozone. It was this news that prompted the euro to move off a four month low against the dollar.

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Written by Tom Tong

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