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Published On: Wed, Nov 21st, 2012

Moody’s Downgrades French Debt, Euro Holds Steady

On Monday, Moody’s credit rating service downgraded France from its previous triple-A status. The move was entirely surprising to investors since Standard & Poor’s downgraded the nation in January of this year. By Tuesday, the euro began to steady against the United States dollar as investors hoped the downgrade would spur the Eurozone to give Greece financial aid. Later in the day, finance ministers in the Eurozone are expected to meet to discuss sending the delayed aid payments to Greece. Earlier in the week, Athens passed a set of laws that will enforce the budget targets imposed upon it.

The euro was last at a level of $1.2810 versus the dollar and decently above its November 13 low of $1.2661. After France’s downgrade, investors briefly sold off the euro before the currency started to stable. If finance ministers continue to delay payment, it could cause the euro to fall drastically. Some strategists believe the euro could reach $1.30 if the debt crisis is resolved in the Eurozone and the United States solves its $600 billion fiscal cliff. If these two objectives do not happen, the euro could fall well below $1.28 and test its November 13 low of $1.2661. Investors are still wary about the potential Greek debt deal since Finland’s finance minister, Jutta Urpilainen, stated that she was uncertain that Greece’s next payment would be approved during the meeting.

Yen Falls

The United States dollar hit a seven-month high against the yen on Monday of 81.59. On Tuesday, it advanced from Monday’s close by 0.1 percent to end at 81.50 yen. The yen has suffered from rumors that the Bank of Japan would adopt unlimited fiscal easing policies. The leader of the Liberal Democratic Party, Shinzo Abe, has advocated this approach. As a potential winner in December’s election, Abe’s announcement has worried investors. Despite this possibility on the horizon, the minutes from the Bank of Japan’s latest policy meeting shows that it will not be embarking on any new fiscal easing measures. In the last week, the upcoming Japanese election has caused the yen to fall against a basket of other currencies. Some analysts even believe that the yen could test levels higher than 82 yen. During the trading session, the euro also made advances against the Japanese currency and reached a four-week peak of 104.50 yen.

British Pound Advances

On Tuesday, the British pound rose against the United States dollar. It reached an overnight high of $1.5935. Recently, the Bank of England lowered its economic growth forecast for the United Kingdom. It has previously expected inflation levels to be at around two percent. The change in forecasts leads many investors to speculate about the possibility of less dovish policies from the Bank of England. Later this week, the Bank of England is expected to report its minutes from its most recent meeting.

If the current trend continues, the British pound will be able to increase against the United States dollar. This will reverse the downward trend it faced in September and allow the Bank of England to break away from its easing cycle.

Dollar Index Rises

As the United States approaches the holiday season, the Dow Jones-FXCM United States Dollar Index advanced to a high of 10,029. Gains by the greenback may decrease over the coming weeks if the United States Federal Reserve Chairman Ben Bernanke chooses to end the bank’s current monetary policy.

Presently, the Federal Reserve Bank is running a policy known as Operation Twist. This open-ended asset purchase program allows the bank to increase its $40 billion monthly limit for asset purchases. At the end of the year, Operation Twist is expected to expire and many investors have debated the possibility of the Fed continuing the program. Stronger employment levels and factory production data in the United States indicate that a continuation of the program may not be needed. If this is the case, the greenback could see even further gains in the coming year. Fed Chairman Ben Bernanke has refrained from announcing new policy measures in the past few months. Factors like inflation may cause Bernanke to select a more neutral tone for the Fed’s future policy decisions.

Kazakhstan’s Rising Credit Rating

Fitch Ratings decided to upgrade Kazakhstan’s investment-grade currency ratings this week by one notch. The Central Asian nation has managed to achieve low levels of government debt, a better balance sheet and faces healthier growth prospects. The rating firm advanced Kazakhstan’s rating to triple-B-plus and stated the nation is the second strongest sovereign net external crediting in the entire category. Fitch reported that the rating change was due to Kazakhstan’s stable economic outlook and the ongoing overhaul of its banking system.

In Kazakhstan, sovereign debt totals roughly 11 percent of gross domestic product. The extra sovereign assets in the nation’s National Fund allow the country to have protection against global economic shocks. Kazakhstan is expected to have a budget surplus in 2013 that totals 3 percent of GDP. This prediction was based off the assumption that oil prices remain above $100 per barrel. Fitch expects the nation to still have a surplus even if oil prices fall below $80 a barrel. Oil revenue brings in 70 percent of Kazakhstan’s exports revenue as well as half of the government’s revenue.

Continued Problems for Europe

Despite all of the work to solve the debt crisis in Europe, some members of the European Central Bank have warned of continued contagion caused by the Eurozone’s economic outlook. Ewald Nowotny, a member of the European Central Bank, reported that there was an increased risk of stagnation that may cause the ECB to reconsider the benchmark interest rate in coming months.

ECB board member Benoit Coeure also warned that the European Union should not be fooled by the recent advances in the financial markets. The Governing Council of the European Central Bank may still need to prop up the ailing economy to prevent a deepening of the recession. Until the Eurozone resolves its debt crisis, it will continue to face renewed fiscal problems.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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