Irish banks need 32bn Euro in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse. The government set up a body, the National Assets Management Agency to take control of toxic assets, the legacy of plunging property prices and the country’s deepest recession. Now it will buy loans with a value of 80 billion Euros, about half the size of the economy.
Finance Minister Brian Lenihan said the information from NAMA on the banks was “truly shocking.” The Irish government will inject 8.3bn Euro into the nationalized Anglo Irish Bank. Two other banks, Allied Irish Bank and Bank of Ireland will try to raise money from private investors.
This second bailout follows the nationalization of Anglo Irish Bank last year. The Irish government also owns 25% and 16% stakes in Allied Irish Banks and Bank of Ireland respectively.
“Finding a long-term solution for Anglo Irish Bank is by far the biggest challenge in resolving the banking crisis,” said Mr. Lenihan, defending the fresh injection of equity into the lender. “The unavoidable reality is that the bank has incurred losses from its large-scale property lending and needs substantial further capital. Unpalatable as it is, only the taxpayer can provide that capital. It is the least worst option.”
The injection of new cash is the first prong of the Irish government’s strategy for dealing with its faltering banking sector. The second involves taking on the banks’ toxic assets in NAMA. On Tuesday it announced that it would buy 1,200 bad loans from the banks for a total of 8.5bn Euros – less than half their face value. Net borrowing overseas by Irish banks amounted to 10% of GDP by 2003, and by 2008 the figure was more than 60%, according to Central Bank Governor Patrick Honohan.
Speaking before the announcement, Eoin O’Callaghan, European economist at BNP Paribas, said the transfer of bad loans was important progress. “This is the start of the plan… designed to cut the vicious circle in Ireland whereby banks aren’t lending in to the economy, which is making things worse and making their own loan portfolios less likely to be paid back, making the banks even less likely to lend,” he said.
Ireland may not be able to afford to pump more money into the banks. The budget deficit widened to 11.7% of GDP last year, almost four times the European Union limit, and the government spent the past year trying to convince investors the state is in control of its finances.
Last week saw the Euro fall to a ten month low against the US Dollar on the forex online market after a credit downgrade for Portugal led to speculation that the deficit crisis which has engulfed Greece and weakened the Euro was about to spread. Ireland, Portugal, Greece, Italy and Spain are currently among the worst performing European economies. What is clear is that without sweeping regulatory changes the Euro Zone will have a hard time restoring confidence in its finances and currency.
Tuesday, April 27, 2010
Forex News: US Treasury delays China Currency Report
The US Treasury is delaying by several months a report on whether China manipulates its currency, the Yuan (or RMB, as it is also known). Treasury Secretary Tim Geithner said he would delay the report, which was due out on 15 April, until after a series of high-level international meetings. He said the series of meetings over the next three months will be “critical” to bringing policy changes that lead to a stronger, “more balanced” global economy.
While the decision may improve US relations with China it will upset some American lawmakers. The US government is under pressure from Congress to take a tougher line on China’s currency peg. A number of members of Congress believe the low Yuan is directly affecting the US economy.
Branding China as a currency manipulator at this stage could set off a chain of events which could eventually result in unilateral US sanctions against Chinese products and could damage relations between the two countries. Geithner faces demands from Congress to label China a currency manipulator for keeping the value of the Yuan at about RMB 6.83 to the US Dollar for almost two years, which many in the US believe gives Chinese exporters an unfair advantage.
China has to keep buying US Dollars to keep its currency from strengthening and consequently is the world’s largest foreign owner of US Treasuries, with holdings valued at $889 billion as of January this year. These investments would lose value as the US Dollar weakens and inflation in the US rises. A stronger Yuan could help slow the buildup of reserves and lower import prices, easing inflationary pressures within China. People’s Bank of China Governor Zhou Xiaochuan said last month that the nation will “sooner or later” exit its anti-crisis policies.
Mr. Geithner justified pushing back his report to the US Congress by saying he would use upcoming events, including a G20 meeting and a US-China summit, to try to encourage the communist superpower to change its currency position. Chinese President Hu Jintao is due in Washington later this month for a nuclear summit.
Jiang Yu, a spokeswoman for the Chinese foreign ministry, said at a briefing in Beijing earlier today that the Yuan’s exchange rate is not the cause of China’s trade imbalance with the US, “consequently, an appreciation of the Yuan will not solve the issue. China never benefited from the US- China trade through manipulation of its currency.”
Financial markets (forex) in Hong Kong will open tomorrow for the first time since April 1st, while China’s were shut yesterday, owing to holidays. Meanwhile Yuan futures traded near the strongest level in 11 weeks on speculation the US decision to delay the report will make China more willing to let the currency resume appreciation in the future.
While the decision may improve US relations with China it will upset some American lawmakers. The US government is under pressure from Congress to take a tougher line on China’s currency peg. A number of members of Congress believe the low Yuan is directly affecting the US economy.
Branding China as a currency manipulator at this stage could set off a chain of events which could eventually result in unilateral US sanctions against Chinese products and could damage relations between the two countries. Geithner faces demands from Congress to label China a currency manipulator for keeping the value of the Yuan at about RMB 6.83 to the US Dollar for almost two years, which many in the US believe gives Chinese exporters an unfair advantage.
China has to keep buying US Dollars to keep its currency from strengthening and consequently is the world’s largest foreign owner of US Treasuries, with holdings valued at $889 billion as of January this year. These investments would lose value as the US Dollar weakens and inflation in the US rises. A stronger Yuan could help slow the buildup of reserves and lower import prices, easing inflationary pressures within China. People’s Bank of China Governor Zhou Xiaochuan said last month that the nation will “sooner or later” exit its anti-crisis policies.
Mr. Geithner justified pushing back his report to the US Congress by saying he would use upcoming events, including a G20 meeting and a US-China summit, to try to encourage the communist superpower to change its currency position. Chinese President Hu Jintao is due in Washington later this month for a nuclear summit.
Jiang Yu, a spokeswoman for the Chinese foreign ministry, said at a briefing in Beijing earlier today that the Yuan’s exchange rate is not the cause of China’s trade imbalance with the US, “consequently, an appreciation of the Yuan will not solve the issue. China never benefited from the US- China trade through manipulation of its currency.”
Financial markets (forex) in Hong Kong will open tomorrow for the first time since April 1st, while China’s were shut yesterday, owing to holidays. Meanwhile Yuan futures traded near the strongest level in 11 weeks on speculation the US decision to delay the report will make China more willing to let the currency resume appreciation in the future.
Forex: Bank of England will keep Rate at 0.5% until at least November
The Bank of England looks set to keep the benchmark interest rate at a record low of 0.5% until at least November as the economic recovery in Britain remains “vulnerable” according to the British Chamber of Commerce. The BCC warned that the recovery was still weak and “serious risk of a setback remains”, with the manufacturing sector still struggling.
The chief economist at the BCC, David Kern said yesterday “In the last forecast, we envisaged an increase to 0.75% in August and to 1% at the end of the year. If you asked me what I think will happen today, I see the first to 0.75% in November or December, and then only next year to 1% or higher.”
“The economy is still vulnerable and it’s important for the moment to maintain interest rates at their current low level and maintain the quantitative easing at its present level,” Kern said. “It’s very important to make it clear to businesses that interest rate increases will not take place this year.”
Manufacturing orders for the first three months of the year were little higher than in the previous three months. New orders continued to fall and employment in the sector suffered a setback after an encouraging fourth quarter in 2009. However last week’s purchasing manager’s index showed that activity in the UK manufacturing sector had grown at its fastest pace in 15 years in March.
Prime Minister Gordon Brown yesterday called a general election for May 6th hoping to capitalize on the end of the recession in the fourth quarter. The UK economy emerged from recession in the fourth quarter of 2009 after six consecutive quarters of contraction. The latest figures show the economy grew by 0.4% in the last three months of 2009, revised upward from the original estimate of 0.1%.
Yesterday the Guardian Newspaper published an opinion poll showing the opposition Conservatives’ lead over ruling Labor has narrowed once again, raising threats about the prospect of a hung parliament at a time when decisive action on the gaping budget deficit is seen as imminent. The Pound has been weakened by deficit concerns; the current UK budget deficit is close to 12.6% of GDP, one of the highest in Europe and the currency has dropped 5.3% against the US Dollar on the forex online market this year.
Bank of England policy makers are due to make the rate announcement tomorrow at 12pm. Economists are predicting that the bank will keep the interest rate unchanged and hold its bond purchase plan at 200 billion Pounds ($304 billion) as officials decide if the economic recovery is strong enough to last.
The chief economist at the BCC, David Kern said yesterday “In the last forecast, we envisaged an increase to 0.75% in August and to 1% at the end of the year. If you asked me what I think will happen today, I see the first to 0.75% in November or December, and then only next year to 1% or higher.”
“The economy is still vulnerable and it’s important for the moment to maintain interest rates at their current low level and maintain the quantitative easing at its present level,” Kern said. “It’s very important to make it clear to businesses that interest rate increases will not take place this year.”
Manufacturing orders for the first three months of the year were little higher than in the previous three months. New orders continued to fall and employment in the sector suffered a setback after an encouraging fourth quarter in 2009. However last week’s purchasing manager’s index showed that activity in the UK manufacturing sector had grown at its fastest pace in 15 years in March.
Prime Minister Gordon Brown yesterday called a general election for May 6th hoping to capitalize on the end of the recession in the fourth quarter. The UK economy emerged from recession in the fourth quarter of 2009 after six consecutive quarters of contraction. The latest figures show the economy grew by 0.4% in the last three months of 2009, revised upward from the original estimate of 0.1%.
Yesterday the Guardian Newspaper published an opinion poll showing the opposition Conservatives’ lead over ruling Labor has narrowed once again, raising threats about the prospect of a hung parliament at a time when decisive action on the gaping budget deficit is seen as imminent. The Pound has been weakened by deficit concerns; the current UK budget deficit is close to 12.6% of GDP, one of the highest in Europe and the currency has dropped 5.3% against the US Dollar on the forex online market this year.
Bank of England policy makers are due to make the rate announcement tomorrow at 12pm. Economists are predicting that the bank will keep the interest rate unchanged and hold its bond purchase plan at 200 billion Pounds ($304 billion) as officials decide if the economic recovery is strong enough to last.
Euro Jumps in Value after Giant EU40bn Aid Package Announced
The Euro has surged against the US Dollar and Sterling on international financial (forex) markets today after EU finance ministers approved a giant 30bn Euro ($40bn) emergency aid package for Greece yesterday but Athens has not requested the plan to be activated yet. With at least another 10 billion Euros expected from the International Monetary Fund in the first year, it could add up to the biggest multilateral financial rescue ever attempted.
“With today’s decision, Europe sends a very clear message that no one, any longer, can play with our common currency, no one can play with our common fate,” Greece’s Prime Minister George Papandreou said in a statement.
The Euro rose by more than 2 cents, or 1.5%, against the US Dollar, to $1.3672, up from $1.3498 at close of trade on Friday. Against the Pound, it rose by almost 1 penny to GBP 0.8840 in early trading this morning. The Euro has dropped 5.7% against the US Dollar this year as the discord within Europe over the response to the Greek crisis sapped faith in Europe’s economic management.
Pushed into action by a week which saw Greece’s borrowing costs soar to an 11 year high, finance ministers from the 16-nation Euro Zone backed a detailed plan for Greece to borrow from European governments and the IMF at significantly below market rates.
IMF chief, Dominique Strauss-Kahn, said the IMF was ready to provide help, possibly through a multi-year standby loan arrangement, and is set to hold talks with Greek, EU and European Central Bank officials in Brussels later today. “The IMF stands ready to join the effort, including through a multi-year stand-by arrangement, to the extent needed and requested by the Greek authorities,” he said in a statement.
A German government official welcomed the agreement, which he said should enable Greece to do its fiscal “homework” on deficit reduction without market distraction. “It should contribute to a calming of the markets so that Greece can take care of its homework in peace and quiet.”
Greece hopes it will not have to ask for the loans. Instead, it hopes that the weight of the huge aid package, even if held in reserve, will reassure investors and make them more willing to keep buying Greek bonds. A Greek official said the government would decide within a few days whether to ask for the aid, depending on whether market interest rates subside.
European Economic and Monetary Affairs Commissioner Olli Rehn said the 3-year Euro Zone loans would carry an interest rate of about 5% — well below current market rates of about 7.3%. That responds to Greece’s appeal to be able to borrow at rates closer to its peers in the currency area. Greece needs to borrow about 11 billion Euros by the end of May to refinance maturing debt and interest charges. Its overall 2010 borrowing requirement is 53 billion Euros.
“With today’s decision, Europe sends a very clear message that no one, any longer, can play with our common currency, no one can play with our common fate,” Greece’s Prime Minister George Papandreou said in a statement.
The Euro rose by more than 2 cents, or 1.5%, against the US Dollar, to $1.3672, up from $1.3498 at close of trade on Friday. Against the Pound, it rose by almost 1 penny to GBP 0.8840 in early trading this morning. The Euro has dropped 5.7% against the US Dollar this year as the discord within Europe over the response to the Greek crisis sapped faith in Europe’s economic management.
Pushed into action by a week which saw Greece’s borrowing costs soar to an 11 year high, finance ministers from the 16-nation Euro Zone backed a detailed plan for Greece to borrow from European governments and the IMF at significantly below market rates.
IMF chief, Dominique Strauss-Kahn, said the IMF was ready to provide help, possibly through a multi-year standby loan arrangement, and is set to hold talks with Greek, EU and European Central Bank officials in Brussels later today. “The IMF stands ready to join the effort, including through a multi-year stand-by arrangement, to the extent needed and requested by the Greek authorities,” he said in a statement.
A German government official welcomed the agreement, which he said should enable Greece to do its fiscal “homework” on deficit reduction without market distraction. “It should contribute to a calming of the markets so that Greece can take care of its homework in peace and quiet.”
Greece hopes it will not have to ask for the loans. Instead, it hopes that the weight of the huge aid package, even if held in reserve, will reassure investors and make them more willing to keep buying Greek bonds. A Greek official said the government would decide within a few days whether to ask for the aid, depending on whether market interest rates subside.
European Economic and Monetary Affairs Commissioner Olli Rehn said the 3-year Euro Zone loans would carry an interest rate of about 5% — well below current market rates of about 7.3%. That responds to Greece’s appeal to be able to borrow at rates closer to its peers in the currency area. Greece needs to borrow about 11 billion Euros by the end of May to refinance maturing debt and interest charges. Its overall 2010 borrowing requirement is 53 billion Euros.
Forex: Kings Influence May Spread into Politics after UK Election
Bank of England Governor Mervyn King’s influence looks set to spread beyond his remit of monetary policy and into politics after an election that opinion polls say may produce no clear winner.
With arguments about how quickly to cut the UK’s record budget deficit, currently 12.6% of GDP, taking centre stage in the general election campaign an inconclusive result could help King set the agenda as he pushes for a plan to reign in the nation’s debt. King, who is a political independent by law has not been afraid to criticize the government and first started warning Prime Minister Gordon Brown about the growing deficit a year ago.
Governor King sparked political controversy in March last year by calling for restraint in government spending at a time when Prime Minister Gordon Brown was insisting on the need to stimulate the economy. In January, his views on the deficit became the basis of a spat between Gordon Brown and Conservative Party leader David Cameron in Parliament.
Opinion polls are continuing to indicate that neither Gordon Browns’ Labour Party nor David Cameron’s Conservative Party will win a clear majority in Parliament. In the event of a so called hung parliament the next government may fail to agree on a clear plan to reduce the record deficit.
It is this uncertainty that has been weighing so heavily on the Pound of late. The currency has fallen 6% against the US Dollar on the forex online market this year. Yesterday it posted a loss of 0.20% against the US Dollar, falling for a second day to close at USD1.5239.
Governor King’s involvement in a future budget plan is already winning support in some political quarters.
“It doesn’t require a big problem to get the three shadow chancellors in a room with the governor of the Bank of England to agree the framework within which you conduct policy,” Vince Cable, the opposition Liberal Democrat treasury spokesman, said on March 31st. Cable may be a candidate to become Chancellor of the Exchequer in a coalition government if neither of the two main parties secures an overall majority.
However Governor King would need to steer a careful course to preserve the central bank’s independence, particularly at a time when the market would be in a fragile condition and there would be increased scrutiny from investors.
Governor King has already attempted to calm market concerns in relation to Britain’s public finances. He said on February 10th that there are “big differences” between the U.K. and Greece, which has struggled to contain market unrest over a budget deficit equivalent to 12.7% of GDP.
The Bank of England will announce the benchmark interest rate at noon today in London, the last decision before the May 6th general election. The bank is expected to keep the rate at its current record low level of 0.1% and hold its bond-purchase plan at 200 billion Pounds.
With arguments about how quickly to cut the UK’s record budget deficit, currently 12.6% of GDP, taking centre stage in the general election campaign an inconclusive result could help King set the agenda as he pushes for a plan to reign in the nation’s debt. King, who is a political independent by law has not been afraid to criticize the government and first started warning Prime Minister Gordon Brown about the growing deficit a year ago.
Governor King sparked political controversy in March last year by calling for restraint in government spending at a time when Prime Minister Gordon Brown was insisting on the need to stimulate the economy. In January, his views on the deficit became the basis of a spat between Gordon Brown and Conservative Party leader David Cameron in Parliament.
Opinion polls are continuing to indicate that neither Gordon Browns’ Labour Party nor David Cameron’s Conservative Party will win a clear majority in Parliament. In the event of a so called hung parliament the next government may fail to agree on a clear plan to reduce the record deficit.
It is this uncertainty that has been weighing so heavily on the Pound of late. The currency has fallen 6% against the US Dollar on the forex online market this year. Yesterday it posted a loss of 0.20% against the US Dollar, falling for a second day to close at USD1.5239.
Governor King’s involvement in a future budget plan is already winning support in some political quarters.
“It doesn’t require a big problem to get the three shadow chancellors in a room with the governor of the Bank of England to agree the framework within which you conduct policy,” Vince Cable, the opposition Liberal Democrat treasury spokesman, said on March 31st. Cable may be a candidate to become Chancellor of the Exchequer in a coalition government if neither of the two main parties secures an overall majority.
However Governor King would need to steer a careful course to preserve the central bank’s independence, particularly at a time when the market would be in a fragile condition and there would be increased scrutiny from investors.
Governor King has already attempted to calm market concerns in relation to Britain’s public finances. He said on February 10th that there are “big differences” between the U.K. and Greece, which has struggled to contain market unrest over a budget deficit equivalent to 12.7% of GDP.
The Bank of England will announce the benchmark interest rate at noon today in London, the last decision before the May 6th general election. The bank is expected to keep the rate at its current record low level of 0.1% and hold its bond-purchase plan at 200 billion Pounds.
Forex News: Commodity Currencies Face Fresh Barriers
Many analysts now feel that commodity currencies risk becoming victims of their own success as this year’s rally has made them increasingly dependent on continuous economic upside surprises to drive them beyond key technical barriers. A move by China to let the Yuan appreciate may also knock these high yielding currencies if it triggers a wave of risk aversion.
The Canadian, Australian and New Zealand dollars have all rallied on the international financial (forex) market in recent weeks. They have been buoyed up by strong economic fundamentals, continuing Chinese demand for commodity exports from all three countries and the prospect of rising domestic interest rates. The rally has brought the Australian and Canadian Dollars, in particular, close to key technical levels beyond which they may now struggle to advance, increasing the risks of a correction.
“Ultimately the forces underpinning the CAD, the Aussie and the Kiwi are not going to change that much and these trends are going to continue into more and more overvalued territory,” said Neil Mellor, currency strategist at Bank of New York Mellon. “Some very nervous investors could look to take profit and it will get quite choppy,” he said, adding that the recent rise in the number of speculators favoring these currencies also left scope for a pullback.
There are signs all three are struggling to make headway. The Canadian Dollar has failed to stay above parity with the US Dollar after breaking through that level last week. On Friday the release of weaker than expected jobs data sparked a sudden fall in the value of the currency, highlighting vulnerability at these levels.
Also last week the Australian Dollar reached a five month high of USD 0.9389 but is now struggling to break through its 2009 high of USD0.9407, especially following the release of Monday’s disappointing housing data. A series of interest rate increases have allowed the currency to appreciate this year, but if other central banks were to start lifting rates this would cut the currencies yield and diminish its market appeal.
Both Canada and New Zealand are expected to raise interest rates in the third quarter; this is also when market analysts feel the US Federal Reserve will move on increasing interest rates.
Now any move by China to revalue the Yuan — which many in the market expect soon — could trigger a knee-jerk negative reaction for commodity currencies as investors feel this could dent risk appetite and weigh on Chinese demand for commodities. “If China allows a significant Yuan appreciation, the Australian and New Zealand dollars would likely be the biggest losers in the G10,” Barclays Capital said in a note to clients.
The Canadian, Australian and New Zealand dollars have all rallied on the international financial (forex) market in recent weeks. They have been buoyed up by strong economic fundamentals, continuing Chinese demand for commodity exports from all three countries and the prospect of rising domestic interest rates. The rally has brought the Australian and Canadian Dollars, in particular, close to key technical levels beyond which they may now struggle to advance, increasing the risks of a correction.
“Ultimately the forces underpinning the CAD, the Aussie and the Kiwi are not going to change that much and these trends are going to continue into more and more overvalued territory,” said Neil Mellor, currency strategist at Bank of New York Mellon. “Some very nervous investors could look to take profit and it will get quite choppy,” he said, adding that the recent rise in the number of speculators favoring these currencies also left scope for a pullback.
There are signs all three are struggling to make headway. The Canadian Dollar has failed to stay above parity with the US Dollar after breaking through that level last week. On Friday the release of weaker than expected jobs data sparked a sudden fall in the value of the currency, highlighting vulnerability at these levels.
Also last week the Australian Dollar reached a five month high of USD 0.9389 but is now struggling to break through its 2009 high of USD0.9407, especially following the release of Monday’s disappointing housing data. A series of interest rate increases have allowed the currency to appreciate this year, but if other central banks were to start lifting rates this would cut the currencies yield and diminish its market appeal.
Both Canada and New Zealand are expected to raise interest rates in the third quarter; this is also when market analysts feel the US Federal Reserve will move on increasing interest rates.
Now any move by China to revalue the Yuan — which many in the market expect soon — could trigger a knee-jerk negative reaction for commodity currencies as investors feel this could dent risk appetite and weigh on Chinese demand for commodities. “If China allows a significant Yuan appreciation, the Australian and New Zealand dollars would likely be the biggest losers in the G10,” Barclays Capital said in a note to clients.
Chinas Economic Growth Points to Possible Currency Revaluation
China’s GDP grew at an annualized rate of 11.9% in the first quarter of the year and experts now predict this may lead to an earlier revaluation of the Yuan on the international currency (forex online) market. The rate of expansion was the fastest seen since 2007 and was slightly higher than expected, while consumer price inflation was surprisingly low at 2.2%. Consumer prices rose 2.4% in March compared to a year earlier.
The figures have helped fuel a debate among experts about whether the recent fiscal stimulus package could be contributing to the risk of an overheating economy. They will also complicate debate in Beijing about when to raise interest rates, which were cut in 2008 to counteract the effects of the global financial downturn.
Cheap plentiful loans are helping to push up housing prices and leading to fears of a bubble. The government has increased mortgage rates and introduced a new sales tax on homes to counteract this effect. Economists say that the GDP figures would now justify firmer measures to reduce inflation.
“We think in absence of a dramatic fall in external demand, it is critical for the government to tighten policy more decisively than they have been doing in order to prevent overheating,” Goldman Sachs economists Yu Song and Helen Qiao said in a note to clients.
However the low rate of inflation has fuelled speculation that there will be a currency revaluation. Either policy-that is a rise in interest rates or an increase in the value of the Yuan-could be used to help slow the Chinese economy.
Unlike a host of its Asian counterparts, including India and Malaysia, China has kept its benchmark interest rates unchanged, even as it leads the way in the global economic recovery. Until now the central bank has relied on curbing credit growth rather than acting on interest rates or the exchange rate to keep the economy on an even keel.
China has been under persistent pressure from President Obama to address the Yuan, which many commentators say is undervalued and gives the Chinese an unfair advantage in export markets. The Yuan’s exchange rate has been pegged to that of the US Dollar since July 2008 to shield the Chinese economy from the worst effects of the global economic downturn. However the strength of the Chinese recovery has fueled criticism of this policy.
On Thursday the Chinese Commerce Ministry reaffirmed its opposition to a stronger Yuan, saying that it would do nothing to ease the problem of near double digit US unemployment.
If the Chinese government is successful at keeping growth at a manageable rate, China is likely to overtake Japan as the world’s second biggest economy this year. Li Xiaochao, spokesman for China’s National Bureau of Statistics, told reporters in Beijing that the “momentum of national economic recovery” had further expanded and there was “a good foundation for reaching the targets set for the whole year”.
The figures have helped fuel a debate among experts about whether the recent fiscal stimulus package could be contributing to the risk of an overheating economy. They will also complicate debate in Beijing about when to raise interest rates, which were cut in 2008 to counteract the effects of the global financial downturn.
Cheap plentiful loans are helping to push up housing prices and leading to fears of a bubble. The government has increased mortgage rates and introduced a new sales tax on homes to counteract this effect. Economists say that the GDP figures would now justify firmer measures to reduce inflation.
“We think in absence of a dramatic fall in external demand, it is critical for the government to tighten policy more decisively than they have been doing in order to prevent overheating,” Goldman Sachs economists Yu Song and Helen Qiao said in a note to clients.
However the low rate of inflation has fuelled speculation that there will be a currency revaluation. Either policy-that is a rise in interest rates or an increase in the value of the Yuan-could be used to help slow the Chinese economy.
Unlike a host of its Asian counterparts, including India and Malaysia, China has kept its benchmark interest rates unchanged, even as it leads the way in the global economic recovery. Until now the central bank has relied on curbing credit growth rather than acting on interest rates or the exchange rate to keep the economy on an even keel.
China has been under persistent pressure from President Obama to address the Yuan, which many commentators say is undervalued and gives the Chinese an unfair advantage in export markets. The Yuan’s exchange rate has been pegged to that of the US Dollar since July 2008 to shield the Chinese economy from the worst effects of the global economic downturn. However the strength of the Chinese recovery has fueled criticism of this policy.
On Thursday the Chinese Commerce Ministry reaffirmed its opposition to a stronger Yuan, saying that it would do nothing to ease the problem of near double digit US unemployment.
If the Chinese government is successful at keeping growth at a manageable rate, China is likely to overtake Japan as the world’s second biggest economy this year. Li Xiaochao, spokesman for China’s National Bureau of Statistics, told reporters in Beijing that the “momentum of national economic recovery” had further expanded and there was “a good foundation for reaching the targets set for the whole year”.
Forex: Buckle up, hold on tight as the currency market prepares for a turbulent ride
Lions, and tigers and bears ohh my! More like Greek debt crisis, volcanic ash grounds European flight flights, Goldman-Sachs commits fraud…major ohh my!
The Forex market is in for a wild ride this week, as a series of unpredicted and surreal events continue to unfold. To begin with, the Greece “situation” will continue to dominate the trading. Growing concerns about whether Greece will need to take the EU-IMF combined €45billion aid package and whether or not this massive rescue plan will even be able to save the debt stricken nation from defaulting will continue to put immense pressure on the Euro.
Now if Europe and Britain did not have enough on their plates already, they are now forced to deal with a cloud of volcanic ash that is covering the continent and has caused the extended closure of European airspace. The disruptions are reportedly costing carriers as much as $300 million in lost revenue per day. According to economists if the closure ends in the coming days, its financial impact will remain limited to the industry such as aviation, tourism and manufacturers that rely on just-in-time delivery by air. However, analysts predict if the flight ban drags on, the effects will be felt much deeper possibly even threatening to snuff out the region’s already feeble economic recovery and applying even more downwards pressure on the already devalued Euro and Pound.
Now across the Atlantic, the Forex market is faced with its latest crisis: Goldman Sachs, one of America’s leading and to this date most profitable investment banks, is being charged by the SEC for fraud. A civil lawsuit filed Friday alleges that Goldman Sachs didn’t stick to its long-standing claim that “clients’ interests always come first,” and instead failed to inform investors that the securities they were selling had been designed to fail by another client, hedge fund Paulson & Co., which in turn profited from the Goldman’s client losses. According to the lawsuit, Goldman mislead investors by telling neglecting to them “vital” pieces of information –namely that the so called triple A financial instruments were really made up of subprime mortgages, and that the hedge fund run by John Paulson was primarily involved in choosing which securities would be part of the portfolio.
U.S stocks fell last week, halting the longest rally in a year, after the publication of the reported fraud allegations. Goldman-Sachs’s stock plunged 13% on Friday, the biggest one day drop in the company’s history, wiping out $12.4-billion of its market value as the Securities and Exchange Commission sued the bank and one of its vice presidents for allegedly misstating and omitting key facts about a collateralized debt obligation.
The news also added pressure on currencies that tend to benefit from increased risk appetite namely the Euro, the Sterling and the Canadian Dollar. Both the US Dollar and the Japanese Yen posted sharp gains on Friday, as the SEC’s alleged charges against Goldman-Sachs prompted investors to seek refuge in both currencies.
Although all signs point to the fact that Goldman-Sachs did break the securities law, the SEC’s investigation into Goldman Sachs could not come at worst possible time. The charges against Goldman, once the most respected but envied firm on Wall Street, come at a time when the idea of a sustainable economic recovery is final taking hold.
In the past months, investor confidence has steadily returned as a string of economic news has shown a more willing consumer and a rapid but consistent increase in manufacturing activity. At the same time, corporate profits this quarter are showing improved top line growth, an indication the economy is improving at a rapid pace – a precursor to hiring.
Unfortunately, at this point, it doesn’t even matter whether the allegations against Goldman Sachs are lawful; the mere thought that one of America’s largest investment houses could commit such fraudulent activities will cover the market with a thick cloud of deep mistrust and uncertainty. How long that sentiment lasts could depend on whether the accusations against the Wall Street banking titan stick, and if they are symptomatic of a larger contagion within the trading practices of major institutions. Either way, SEC allegations that Goldman misled investors about the subprime mortgages it sold them does not help build confidence that financial markets are operating fairly.
The dollar fell to a three week low against the yen in Asia Monday as hedge funds sold the unit on the view that fraud charges leveled against Goldman Sachs could continue to weigh on equities and U.S. interest rates this week. According to analysts, the greenback may fall further against the yen in the coming days if stocks slump on growing concerns that U.S. regulators may broaden probes into other financial firms, dealers said. The U.S. unit would also likely suffer on any weaker-than-expected U.S. financial sector earnings.
The charges against Goldman’s arrive just as lawmakers in Washington are negotiating how to reform the U.S banking system. A complete overhaul in the financial system is the next major piece of legislation that President Obama’s agenda. Already the markets have begun to fall just on the mere thought that Washington will begin to crack down on the Wall Street firms. Given the likely public outcry over the Goldman Sachs news, the U.S. government “may strengthen (banking) regulations, thereby raising uncertainty over the U.S. financial sector,” said Daisaku Ueno, chief analyst at Japanese brokerage Gaitame.com. That may benefit the Japanese currency most, Ueno said, as investors consider it to be the safest refuge when global financial markets grow turbulent.
The Forex market is in for a wild ride this week, as a series of unpredicted and surreal events continue to unfold. To begin with, the Greece “situation” will continue to dominate the trading. Growing concerns about whether Greece will need to take the EU-IMF combined €45billion aid package and whether or not this massive rescue plan will even be able to save the debt stricken nation from defaulting will continue to put immense pressure on the Euro.
Now if Europe and Britain did not have enough on their plates already, they are now forced to deal with a cloud of volcanic ash that is covering the continent and has caused the extended closure of European airspace. The disruptions are reportedly costing carriers as much as $300 million in lost revenue per day. According to economists if the closure ends in the coming days, its financial impact will remain limited to the industry such as aviation, tourism and manufacturers that rely on just-in-time delivery by air. However, analysts predict if the flight ban drags on, the effects will be felt much deeper possibly even threatening to snuff out the region’s already feeble economic recovery and applying even more downwards pressure on the already devalued Euro and Pound.
Now across the Atlantic, the Forex market is faced with its latest crisis: Goldman Sachs, one of America’s leading and to this date most profitable investment banks, is being charged by the SEC for fraud. A civil lawsuit filed Friday alleges that Goldman Sachs didn’t stick to its long-standing claim that “clients’ interests always come first,” and instead failed to inform investors that the securities they were selling had been designed to fail by another client, hedge fund Paulson & Co., which in turn profited from the Goldman’s client losses. According to the lawsuit, Goldman mislead investors by telling neglecting to them “vital” pieces of information –namely that the so called triple A financial instruments were really made up of subprime mortgages, and that the hedge fund run by John Paulson was primarily involved in choosing which securities would be part of the portfolio.
U.S stocks fell last week, halting the longest rally in a year, after the publication of the reported fraud allegations. Goldman-Sachs’s stock plunged 13% on Friday, the biggest one day drop in the company’s history, wiping out $12.4-billion of its market value as the Securities and Exchange Commission sued the bank and one of its vice presidents for allegedly misstating and omitting key facts about a collateralized debt obligation.
The news also added pressure on currencies that tend to benefit from increased risk appetite namely the Euro, the Sterling and the Canadian Dollar. Both the US Dollar and the Japanese Yen posted sharp gains on Friday, as the SEC’s alleged charges against Goldman-Sachs prompted investors to seek refuge in both currencies.
Although all signs point to the fact that Goldman-Sachs did break the securities law, the SEC’s investigation into Goldman Sachs could not come at worst possible time. The charges against Goldman, once the most respected but envied firm on Wall Street, come at a time when the idea of a sustainable economic recovery is final taking hold.
In the past months, investor confidence has steadily returned as a string of economic news has shown a more willing consumer and a rapid but consistent increase in manufacturing activity. At the same time, corporate profits this quarter are showing improved top line growth, an indication the economy is improving at a rapid pace – a precursor to hiring.
Unfortunately, at this point, it doesn’t even matter whether the allegations against Goldman Sachs are lawful; the mere thought that one of America’s largest investment houses could commit such fraudulent activities will cover the market with a thick cloud of deep mistrust and uncertainty. How long that sentiment lasts could depend on whether the accusations against the Wall Street banking titan stick, and if they are symptomatic of a larger contagion within the trading practices of major institutions. Either way, SEC allegations that Goldman misled investors about the subprime mortgages it sold them does not help build confidence that financial markets are operating fairly.
The dollar fell to a three week low against the yen in Asia Monday as hedge funds sold the unit on the view that fraud charges leveled against Goldman Sachs could continue to weigh on equities and U.S. interest rates this week. According to analysts, the greenback may fall further against the yen in the coming days if stocks slump on growing concerns that U.S. regulators may broaden probes into other financial firms, dealers said. The U.S. unit would also likely suffer on any weaker-than-expected U.S. financial sector earnings.
The charges against Goldman’s arrive just as lawmakers in Washington are negotiating how to reform the U.S banking system. A complete overhaul in the financial system is the next major piece of legislation that President Obama’s agenda. Already the markets have begun to fall just on the mere thought that Washington will begin to crack down on the Wall Street firms. Given the likely public outcry over the Goldman Sachs news, the U.S. government “may strengthen (banking) regulations, thereby raising uncertainty over the U.S. financial sector,” said Daisaku Ueno, chief analyst at Japanese brokerage Gaitame.com. That may benefit the Japanese currency most, Ueno said, as investors consider it to be the safest refuge when global financial markets grow turbulent.
Greek crisis wakeup call as IMF warns of the beginning of a new phase in global financial crisis
This is not the time to hit the snooze button, as International Monetary fund names Greek fiscal crisis a “wake-up call” on sovereign debt risk.
This morning the Euro slipped against the U.S Dollar (on the forex market) as Greek officials prepare to join counterparts from the Euro-Zone, the IMF and the European Central Bank, today, in order begin hammering out the deficit-cutting measures the debt- stricken nation will need to accept in order to tap the EU-IMF joint €45 billion emergency bailout package. According to reports, the Greek government needs to raise about €10 billion by the end of May, as its soaring financing costs are lending urgency to the talks.
Despite earlier claims, the Greek Finance Minister acknowledged yesterday that Athens could be compelled to seek rescue financing from its European Union partners and from the International Monetary Fund. A rise in unemployment along with soaring market interest rates has applied more and more pressure on the already floundering nation. George Papaconstantinou said that the country would not be left “high and dry” next month when it needs to refinance its existing borrowings, as he declared that “Greece will borrow either from the markets or from its partners”.
Greece’s ongoing battle to finance a deficit equivalent to 12.9% of its gross domestic product, and more than four times the European Union allowed limit, has undermined the credibility of Europe’s monetary union and has led to a 6.1% drop in the single currency value this year, as forex investors seek refuge in more risk adverse currencies. Budget deficits across the region have surged as the financial crisis forced government to bail out banks and spend billions on stimulus to ease the effects of the worst recession in since the great depression.
Despite a joint commitment from the EU and IMF to provide a €45 billion financial rescue package, the market has failed to rally behind Greece. The gap between the yield on its ten-year bond and the equivalent German benchmark bond rose to a record 4.91% points, taking the Greek long-term government borrowing rate above 8%. While a default by Greece would be detrimental to the other Euro Zone countries, and several harm the stability of the EU and its single currency, the severity of the Greek crisis has shed light on a new potential threat to the global economy.
According to the IMF, Greece’s upheaval could mark the starting point of a “new phase” in the global financial crisis, one marked by increased concerns over rising sovereign debt. While the IMF slashed its projections for bank losses from the crisis to an amount deemed manageable, the rapid buildup of sovereign debt among advanced countries to levels not seen since the end of World War II has emerged as the biggest threat to global financial stability. “In spite of recent improvements in the outlook and the health of the global financial system, stability is not yet assured,” said Jose Vinals, director of the IMF’s monetary and capital markets department, as the IMF warned that “Higher debt levels have the potential for spillovers across financial systems, and to impact financial stability”.
Mounting risks of sovereign default can create a reaction that will affect the entire global economy including pushing up interest rates on government debt, which in turn will cause interest rates on commercial debt to increase. A diminished faith in the value of government guarantees can also push up borrowing costs across nations as the market demands higher interest rates for commercial debt. Two former senior IMF economists, Kenneth and Rogoff, have been warning that banking crises frequently lead to sovereign debt crises several years later, in part because governments spend so heavily to restore their banking systems to health – which is exactly what the IMF fears will happen.
Jose Vinals, director of the IMF’s monetary and capital markets department, warned that “Greece is a wake-up call!” In all other countries, which fortunately are in a better situation, what we are saying is do not let the financial situation get out of hand and undertake the necessary measures precisely to remain on the safe side.” According to the IMF, careful management of sovereign risks is essential: governments need to design credible medium-term fiscal consolidation plans in order to curb rising debt burdens and avoid taking the credit crisis into a new phase.
Mr. Vinals went on to say “Now that there is time, it’s very important that these emerging sovereign risk concerns are addressed through appropriate policy action, precisely in order to consolidate financial stability”. However, whether this “Greek siren” was heard in time, and whether the world’s developed countries can act now remains to be seen – it is a very complex and dangerous situation, one that is further complicated by the fact that heightened market concerns about sovereign debt could require some countries to start removing fiscal stimulus sooner than planned – something that many governments might be too fearful of to even contemplate.
This morning the Euro slipped against the U.S Dollar (on the forex market) as Greek officials prepare to join counterparts from the Euro-Zone, the IMF and the European Central Bank, today, in order begin hammering out the deficit-cutting measures the debt- stricken nation will need to accept in order to tap the EU-IMF joint €45 billion emergency bailout package. According to reports, the Greek government needs to raise about €10 billion by the end of May, as its soaring financing costs are lending urgency to the talks.
Despite earlier claims, the Greek Finance Minister acknowledged yesterday that Athens could be compelled to seek rescue financing from its European Union partners and from the International Monetary Fund. A rise in unemployment along with soaring market interest rates has applied more and more pressure on the already floundering nation. George Papaconstantinou said that the country would not be left “high and dry” next month when it needs to refinance its existing borrowings, as he declared that “Greece will borrow either from the markets or from its partners”.
Greece’s ongoing battle to finance a deficit equivalent to 12.9% of its gross domestic product, and more than four times the European Union allowed limit, has undermined the credibility of Europe’s monetary union and has led to a 6.1% drop in the single currency value this year, as forex investors seek refuge in more risk adverse currencies. Budget deficits across the region have surged as the financial crisis forced government to bail out banks and spend billions on stimulus to ease the effects of the worst recession in since the great depression.
Despite a joint commitment from the EU and IMF to provide a €45 billion financial rescue package, the market has failed to rally behind Greece. The gap between the yield on its ten-year bond and the equivalent German benchmark bond rose to a record 4.91% points, taking the Greek long-term government borrowing rate above 8%. While a default by Greece would be detrimental to the other Euro Zone countries, and several harm the stability of the EU and its single currency, the severity of the Greek crisis has shed light on a new potential threat to the global economy.
According to the IMF, Greece’s upheaval could mark the starting point of a “new phase” in the global financial crisis, one marked by increased concerns over rising sovereign debt. While the IMF slashed its projections for bank losses from the crisis to an amount deemed manageable, the rapid buildup of sovereign debt among advanced countries to levels not seen since the end of World War II has emerged as the biggest threat to global financial stability. “In spite of recent improvements in the outlook and the health of the global financial system, stability is not yet assured,” said Jose Vinals, director of the IMF’s monetary and capital markets department, as the IMF warned that “Higher debt levels have the potential for spillovers across financial systems, and to impact financial stability”.
Mounting risks of sovereign default can create a reaction that will affect the entire global economy including pushing up interest rates on government debt, which in turn will cause interest rates on commercial debt to increase. A diminished faith in the value of government guarantees can also push up borrowing costs across nations as the market demands higher interest rates for commercial debt. Two former senior IMF economists, Kenneth and Rogoff, have been warning that banking crises frequently lead to sovereign debt crises several years later, in part because governments spend so heavily to restore their banking systems to health – which is exactly what the IMF fears will happen.
Jose Vinals, director of the IMF’s monetary and capital markets department, warned that “Greece is a wake-up call!” In all other countries, which fortunately are in a better situation, what we are saying is do not let the financial situation get out of hand and undertake the necessary measures precisely to remain on the safe side.” According to the IMF, careful management of sovereign risks is essential: governments need to design credible medium-term fiscal consolidation plans in order to curb rising debt burdens and avoid taking the credit crisis into a new phase.
Mr. Vinals went on to say “Now that there is time, it’s very important that these emerging sovereign risk concerns are addressed through appropriate policy action, precisely in order to consolidate financial stability”. However, whether this “Greek siren” was heard in time, and whether the world’s developed countries can act now remains to be seen – it is a very complex and dangerous situation, one that is further complicated by the fact that heightened market concerns about sovereign debt could require some countries to start removing fiscal stimulus sooner than planned – something that many governments might be too fearful of to even contemplate.
Forex News: Euro Steadies as Greece Moves Closer To Aid
Greece has moved closer to securing emergency funding before debt payments become due in mid May as finance minister George Papaconstantinou warned investors they will “lose their shirts” if they bet that the nation will default.
The euro stabilized in the Asian forex online market early this morning after the Greek finance minister said yesterday the aid would arrive in time to avert what would be the euro zone’s first sovereign debt default, although there are increasing indications that the 45 billion euro rescue package may not be large enough.
The euro was steady at around $1.3375 after a short-covering rebound on Friday. It fell as far as $1.3201 in the previous session, its lowest since April 2009, but it recovered as Greece sought to activate the financial aid package. Against the yen, the euro edged up 0.2% to 126.00 yen, having risen 1% on Friday.
Greece has 8.5 billion euro’s worth of bonds maturing on the 19th of May so any delay in receiving financial aid could trigger another sell off of assets and hurt global markets. Greece’s debt which totals 115% of GDP as well as a budget deficit of almost 14% has led to major concerns among investors.
The debt crisis has dominated the agenda at the weekends G-20 meetings in Washington. Canadian Finance Minister Jim Flaherty told reporters that some in the G-20 worry the plan now being crafted is “not enough” and want to ensure any rescue is a “one-time event.”
“Greece has eclipsed everything,” said Sophia Drossos, co-head of global foreign-exchange strategy at Morgan Stanley in New York. “It’s a fluid and fast-moving situation that has captured the attention of markets not least because it has the potential to be a systemic threat.”
Even as Greece draws close to receiving the aid markets are still signaling concern Greece’s fiscal woes may not be over as the country tries to bring its deficit back underneath the EU’s 3% limit by 2012. A recovery in Greek bonds yields fizzled out last Friday after the government’s request for support, pushing the yield on the two-year bond to 10.23% after it dropped to 9.63%. This is almost triple the rate on an equivalent German bond.
There is still strong opposition to the aid in Germany. The German finance minister said over the weekend that any loan depended “entirely on whether Greece continues in the coming years with the strict savings course it has launched”. Germany’s government must pass legislation before the aid can be made available. Italian Finance Minister Giulio Tremonti warned Germany against dragging its feet, saying “if your neighbor’s house catches fire, it’s not to your advantage to sit back.”
However Mr. Papaconstantinou said he believed Germany would agree to help: “They are completely on board on the need for a framework of conditionality and fully supportive of a decision that Germany has co-signed at the level of heads of state and government and at the Euro group level.” He also said bridge loans may be possible if all countries cannot reach agreement in time. He promised to meet all obligations, and suggested his country could raise funds by embarking on a privatization program.
European Central Bank officials in Washington played down speculation that Greece’s woes could spill over to other indebted EU member states. “There is no economic cause for a contagion discussion,” ECB Governing Council member Ewald Nowotny said in an interview.
The euro stabilized in the Asian forex online market early this morning after the Greek finance minister said yesterday the aid would arrive in time to avert what would be the euro zone’s first sovereign debt default, although there are increasing indications that the 45 billion euro rescue package may not be large enough.
The euro was steady at around $1.3375 after a short-covering rebound on Friday. It fell as far as $1.3201 in the previous session, its lowest since April 2009, but it recovered as Greece sought to activate the financial aid package. Against the yen, the euro edged up 0.2% to 126.00 yen, having risen 1% on Friday.
Greece has 8.5 billion euro’s worth of bonds maturing on the 19th of May so any delay in receiving financial aid could trigger another sell off of assets and hurt global markets. Greece’s debt which totals 115% of GDP as well as a budget deficit of almost 14% has led to major concerns among investors.
The debt crisis has dominated the agenda at the weekends G-20 meetings in Washington. Canadian Finance Minister Jim Flaherty told reporters that some in the G-20 worry the plan now being crafted is “not enough” and want to ensure any rescue is a “one-time event.”
“Greece has eclipsed everything,” said Sophia Drossos, co-head of global foreign-exchange strategy at Morgan Stanley in New York. “It’s a fluid and fast-moving situation that has captured the attention of markets not least because it has the potential to be a systemic threat.”
Even as Greece draws close to receiving the aid markets are still signaling concern Greece’s fiscal woes may not be over as the country tries to bring its deficit back underneath the EU’s 3% limit by 2012. A recovery in Greek bonds yields fizzled out last Friday after the government’s request for support, pushing the yield on the two-year bond to 10.23% after it dropped to 9.63%. This is almost triple the rate on an equivalent German bond.
There is still strong opposition to the aid in Germany. The German finance minister said over the weekend that any loan depended “entirely on whether Greece continues in the coming years with the strict savings course it has launched”. Germany’s government must pass legislation before the aid can be made available. Italian Finance Minister Giulio Tremonti warned Germany against dragging its feet, saying “if your neighbor’s house catches fire, it’s not to your advantage to sit back.”
However Mr. Papaconstantinou said he believed Germany would agree to help: “They are completely on board on the need for a framework of conditionality and fully supportive of a decision that Germany has co-signed at the level of heads of state and government and at the Euro group level.” He also said bridge loans may be possible if all countries cannot reach agreement in time. He promised to meet all obligations, and suggested his country could raise funds by embarking on a privatization program.
European Central Bank officials in Washington played down speculation that Greece’s woes could spill over to other indebted EU member states. “There is no economic cause for a contagion discussion,” ECB Governing Council member Ewald Nowotny said in an interview.
Is a weakened Pound the spoon full medicine Britain needs to fight its economic recession?
Over the past few years, forex online investors have watched as the British Pound tumbled against its major currency counterparts. Since November 2007, the sterling has lost about a quarter of its value against the US Dollar and the Euro. While it is now trading around $1.54, analysts predict that the currency will continue to fall, trading around $1.48 by the end of the year.
While many Brits quiver at the mere thought of the devaluation of their precious sovereign currency, a weakened Pound may actually be beneficial for the U.K’s struggling economy. Whereas many of the world’s developed nations are already showing signs of a full economic recovery, the UK continues to battle with sluggish growth and a huge budget deficit – lagging behind its peer nations in exiting the worst recession since the 1930’s. A weakened Pound may be just the key ingredient Britain needs in order to restart its floundering economy.
A weakened currency is not only beneficial for Britain as it will boost economic growth by making British goods and services more competitive on world markets, thus increasing exports, but it will also help to rebalance the structure of the economy.
Recent government data show that exports are beginning to stabilize as Britain’s Office for National Statistics reported that in February that imports declined and exports rose at their fastest pace since 2003. While February’s figures are artificially high given that the previous month’s numbers were undermined by Britain’s worst winter in decades, they still prove that the poor January figures were a a mere blip and not a trend. More importantly, the February data highlights the increased demand from the U.S. and non-European regions—fueling hopes that a global rebound could lift Britain. Sales of British goods to members of the euro zone rose about 3% in February from January, the government reported, while sales to non-European Union members jumped 15%. Similarly, the International Monetary Fund now predicts the U.K. economy will grow by 2.5% next year, close to the U.S.’s 2.55%.
However, despite the help from a decline in sterling, economists still expect Friday’s GDP to report a week reading of 0.4% in growth – the same rate seen in the last quarter of 2009, when Britain managed to scarcely escape its 18 moth recession. However, most economists fell that it is only a matter of time, before Britain begins to see the full benefits of a devalued currency. After a less-severe downturn in the early 1990s, it took two full years before Britain’s economy began to see even the full advantages in trade given by a weak currency.
Britain’s currency economy state has become the key issue in the upcoming national elections (scheduled for May 6th). With consumers burdened by debt and the government wrestling with a massive budget deficit, exports are increasingly seen as the key to recovery. To boost that sector of the economy, policymakers have silently welcomed the sterling’s drop in value over the past two years.
While a strong currency is desirable during periods of economic “boom”, when economic activity needs to be restrained to prevent inflation, a weak currency is sought after during times of economic downturns. Right now, every big economy in the world, with the possible exception of China, needs extra stimulus — and therefore wants to have a weak currency. But that, of course, is impossible, since as every forex investors knows for every currency that weakens another currency increase. And it is this mathematical fact that could well turn out to be a significant economic headache in the year ahead for Britain. If the economic recovery in the Euro Zone and Japan turns out to be slower than in Britain, while political conditions in America continue to deteriorate, the current weakness of the pound may be impossible to sustain.
So as while many Brits remain fearful that their currency will continue to fall, and that their money will be worth less abroad, they should really be concerned that their currency will begin to rapidly appreciate, stalling Britain’s recovery from the worst recession since the Great Depression.
While many Brits quiver at the mere thought of the devaluation of their precious sovereign currency, a weakened Pound may actually be beneficial for the U.K’s struggling economy. Whereas many of the world’s developed nations are already showing signs of a full economic recovery, the UK continues to battle with sluggish growth and a huge budget deficit – lagging behind its peer nations in exiting the worst recession since the 1930’s. A weakened Pound may be just the key ingredient Britain needs in order to restart its floundering economy.
A weakened currency is not only beneficial for Britain as it will boost economic growth by making British goods and services more competitive on world markets, thus increasing exports, but it will also help to rebalance the structure of the economy.
Recent government data show that exports are beginning to stabilize as Britain’s Office for National Statistics reported that in February that imports declined and exports rose at their fastest pace since 2003. While February’s figures are artificially high given that the previous month’s numbers were undermined by Britain’s worst winter in decades, they still prove that the poor January figures were a a mere blip and not a trend. More importantly, the February data highlights the increased demand from the U.S. and non-European regions—fueling hopes that a global rebound could lift Britain. Sales of British goods to members of the euro zone rose about 3% in February from January, the government reported, while sales to non-European Union members jumped 15%. Similarly, the International Monetary Fund now predicts the U.K. economy will grow by 2.5% next year, close to the U.S.’s 2.55%.
However, despite the help from a decline in sterling, economists still expect Friday’s GDP to report a week reading of 0.4% in growth – the same rate seen in the last quarter of 2009, when Britain managed to scarcely escape its 18 moth recession. However, most economists fell that it is only a matter of time, before Britain begins to see the full benefits of a devalued currency. After a less-severe downturn in the early 1990s, it took two full years before Britain’s economy began to see even the full advantages in trade given by a weak currency.
Britain’s currency economy state has become the key issue in the upcoming national elections (scheduled for May 6th). With consumers burdened by debt and the government wrestling with a massive budget deficit, exports are increasingly seen as the key to recovery. To boost that sector of the economy, policymakers have silently welcomed the sterling’s drop in value over the past two years.
While a strong currency is desirable during periods of economic “boom”, when economic activity needs to be restrained to prevent inflation, a weak currency is sought after during times of economic downturns. Right now, every big economy in the world, with the possible exception of China, needs extra stimulus — and therefore wants to have a weak currency. But that, of course, is impossible, since as every forex investors knows for every currency that weakens another currency increase. And it is this mathematical fact that could well turn out to be a significant economic headache in the year ahead for Britain. If the economic recovery in the Euro Zone and Japan turns out to be slower than in Britain, while political conditions in America continue to deteriorate, the current weakness of the pound may be impossible to sustain.
So as while many Brits remain fearful that their currency will continue to fall, and that their money will be worth less abroad, they should really be concerned that their currency will begin to rapidly appreciate, stalling Britain’s recovery from the worst recession since the Great Depression.
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