Thursday, January 27, 2011

Yen slides on S&P downgrade

Ratings-giant Standard & Poor's reassessment of the fiscal health of
Japan was responsible for a slump in the yen on Thursday while an ECB
official sent another hawkish signal helping further vilify a recent
rally for the euro.

*Japanese yen –* The dollar rose by more than one yen as it swooned
in the aftermath of the downgrade. The move from AA to AA- might be a
small move but sends a bigger signal and changes the dynamic of the
relationship between the safe haven pairing. S&P said that the
downgrade was on account of worsening debt ratios, which it says still
won't peak for a further 15 years. Japanese officials responded by
saying that the government was trying to overhaul social security and
reform taxes and defended Prime Minister Kan's policies. Some even
said that they were "misunderstood." By tossing the scale of
Japan's fiscal challenges under the spotlight the S&P move shook
investors' willingness to treat it as a safe haven. On account of
the size of domestic holdings of government paper, the common
perception is that it would be almost impossible to force a run on the
yen. The yen played second fiddle to the dollar this morning as it
rose to ¥83.21.

*Euro –* ECB official Lorenzo Bini Smaghi fanned inflation fears of
earlier this month when he noted that rising import costs can't be
ignored. The euro surged to $1.3756 to an 11-week high in response to
his warning before paring gains. There is a notable difference in tone
between the Fed's aware yet sanguine attitude towards rising
commodity prices and the attitude of the European central bank.

Against the yen the euro rallied more than 1% to ¥113.92.
*U.S. Dollar –* In today's melee the dollar index is unchanged
despite a 1.1% rally against the Japanese unit. The dollar weakened
midweek in response to the unexpressive review from the FOMC at the
end of its two-day meeting. The recovery continues but remains
"insufficient to bring about a significant improvement in labor
market conditions." In conjunction with proposed spending cuts in
Tuesday's Presidential address dealers turned soft on the dollar
until the downgrade of Japanese long-term debt. The Fed's lack of
indication that it was willing to end what it calls its exceptionally
low period for interest rates also seems to be weighing further on the
dollar these days. The FOMC also used the elevated level of
unemployment to justify its $600 billion bond-buying program.

*British pound –* The pound continues of voyage of recovery into the
unknown and on Thursday rose to $1.5970 almost wiping out all of the
losses suffered following news of a sharp contraction in activity at
the end of last year. Investors are split over whether the Bank of
England will be forced to raise interest rates in response to what the
central bank has already called temporary factors. In a speech on
Tuesday the Governor predicted that inflation would return to below
target over the medium term. The euro weakened against the pound to
buy 85.93 pence. The pound was unresponsive to a report showing
further weakness last month in British home prices.

*Aussie dollar –* Prime Minister Julia Gillard said she'd draft in
an income tax worth A$1.8 billion in order to help pay for a clan-up
operation following the Queensland flooding. The announcement weakened
the Australian dollar on two fronts. The move could further crimp
domestic spending at a time when mortgage interest rates have been
rising. Second the tax will be a new factor for the Reserve Bank to
consider when considering whether or not to raise interest rates any
further. The Aussie fell by 0.9% against the greenback to stand at
99.06 U.S. cents but off an earlier session low at 98.75 cents.

*Canadian dollar –* The Canadian dollar is marginally lower but
continues to tag alongside the recovering U.S. unit. On Thursday the
Canadian unit commands $1.0046 U.S. cents.
Source: Fxstreet.com

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