Continued uncertainty and fiscal hazard

Tom Tong03/Feb/2012Currency Updates

USD

Federal reserve Chairman Ben Bernanke warned yesterday that the situation of the current US economy was not sustainable, and that unless the deficits were bought under control they could pose a significant threat to the economy. “Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.” Alarmingly he also warned that slowing of spending too quickly could increase the effect. He has kept the option for further easing on the table. The continued uncertainty and relatively low value of the Dollar is expected to push safe haven investors towards commodities. On a slightly brighter note, US claims for unemployment fell last month pointing to a good nonfarm payroll figure published later today offering more clues on the health of the worlds largest economy. Other data should produce some volatility.

GBP

Despite news of unemployment rising to 9.1% and some progress made on the Euro crisis talks, the pound is managing to hold its own against other major currencies. With continued pressure from economists, the time may have come to ease the austerity drive; research has found that £15billion debt financed investment could reduce this high unemployment by 0.3% points in 2 years. However, the erosion this will cause on market confidence is not what we need to avoid a second quarter of recession.

EUR

Monday will be the big day for the Euro when finance ministers aim to agree a second financing package for Greece. It is expected that Athens will have to undertake drastic reforms and bank and private bond holders will finally find out the extent of their ‘voluntary’ losses. This would hopefully pave the way for the long journey to recovery for Greece and the Euro.

Despite the slow progress so far with the debt restructuring talks, sentiment has improved in the European debt markets as European Central Banks funding provisions in December filter through. Firm news on Monday would see the sentiment widen.

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Written by Tom Tong

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