Published On: Tue, Nov 27th, 2012

Euro Hits Three-Week High

As the week drew to an end, the euro managed to reach a three-week peak against the dollar. The euro has gained against the greenback over the last two weeks as the Eurozone approaches a much-need agreement to release further aid to Greece. The common currency was also aided by a boost in German business morale.

This week, Greece announced that the International Monetary Fund was choosing to relax its debt reduction target for the nation. Other sources in the Eurozone warned that the funding gap is still much larger than Greece has suggested. During the session, the euro reached a high of $1.2943. It broke above its 55-day moving average of $1.2910 and was last at $1.2941, or 0.5 percent higher, for the day. The currency reached a seven-month high of 106.73 yen. By the end of the session, it was trading 0.4 percent higher against Japan’s currency at 106.65 yen.

Over the last two weeks, the euro has advanced by 2 percent versus the dollar. Some reports have come out that indicate finance ministers in the Eurozone will host a teleconference on Saturday in preparation for their meeting on Monday. This meeting is expected to result in the release of Greece’s next aid tranche.

Japanese Advances Against the Dollar

In the last few weeks, investors have speculated over the coming Japanese elections in January. These elections are expected to place the head of the Liberal Democratic Party, Shinzo Abe, in power. Abe has made headlines in recent weeks for advocating an aggressive, unlimited fiscal policy for the Bank of Japan. If elected, Abe has stated that the BOJ should start more drastic monetary stimulus measures. Worried investors have dropped the yen and the greenback has risen almost four percent against it in the last two weeks.

After two weeks of gaining, the United States dollar lost 0.1 percent on Friday to 82.39 yen. On Thursday, it hit its strongest level since early April at 82.82 yen.

Shinzo Abe’s party wants to set a two percent inflation target and suspend sales tax increases. If the economy stays stuck in a cycle of deflation, the Liberal Democratic Party wants the Bank of Japan to purchase bonds as a funding measure for public works projects. If these measures are passed, then the yen will remain under pressure.

Euro Rises Versus Sterling

Europe’s common currency also managed to reach a one-month peak versus the United Kingdom’s pound on Friday. The advance was attributed to the upcoming debt tranche agreement and positive economic indicators out of Germany. If Athens manages to pass its latest fiscal test, the euro could manage to rise even higher versus the pound in the next week.

Reserves Drop In India

For the week ending on November 16, foreign exchange reserves dropped in India. Over the last week, the fell by US$32.7 million to end on Friday at US$293.52. Data from the Reserve Bank of India showed that reserves also dropped by US$781.5 million the previous week to US$293.55. On the week ending on November 2, reserves dropped by US$950.2 million to a level of US$294.24 billion.

The largest component of foreign exchange reserves is known as foreign currency assets (FCA). During the last week, India watched its FCAs fall by US$16.4 million to a level of US$258.69 billion. Some of the changes can be attributed to how forex reserves are reported. The Reserve Bank of India records its holdings in United States dollars. If the value of the greenback changes drastically, foreign exchange reserves will appear different.

Gold reserves in India remained at a level of $28.18 billion. Since they advanced by US$56.4 on November 2, gold reserves have remained unchanged. Special drawing rights fell by US$10.8 million during the last week to a level of US$4.39 billion.

Real Drops

The Brazilian real dropped below the key level of 2.11 reals per US dollar over the last week. Some analysts believe that this new level is here to stay. The central bank in Brazil attempted to stop the real from depreciating by performing a traditional currency swap auction. Before the swap could take place, the announcement caused the real to drop below 2.10 per dollar.

The chief of the central bank, Alexandre Tombini, stated earlier in the week that the bank was prepared to aid the market and stop the real from depreciating too quickly. Although a weaker real helps the export market, a drastic depreciation is seen as undesirable by Tombini.

In the next year, the Brazilian economy is forecasted to grow by just 1.5 percent. In 2010, Brazil enjoyed a two-decade high of 7.5 percent growth in gross domestic product. Despite the forecasted growth, some analysts are still concerned about the future of the Brazilian economy. A weakened industrial sector has caused some investors to speculate about the ability of the economy to recover from the temporary slowdown. In 2013, Brazil’s gross domestic product is expected to grow by four percent.

The Fed Aids ECB

In the last week, the United States Federal Reserve Bank gave a total of $3.306 billion in liquidity to the European Central Bank. The funds were sent via swap lines for foreign central banks. This loan was granted for an eight day term at a 0.66 percent interest rate. In the last week, the European Central Bank has been the only one to use the Fed’s swap lines for foreign central banks.

Currently, the United States Federal Reserve Bank has swap arrangements with the Bank of Japan, the Bank of Canada, the Swiss National Bank, the Bank of England and the European Central Bank. These agreements were formed in attempt to help prevent strains in short-term funding in Europe. On Thursday, the New York Federal Reserve Bank announced their grant of liquidity to the European Central Bank.

Latin America

By the end of Friday’s session, the Mexican peso was trading 0.60 percent higher at 12.9520 versus the United States dollar. The Peruvian sol was steady at 2.5880 while the Colombian peso lost 0.45 percent to end at 1,823.7500 against the greenback. In Chile, the peso dropped by 0.40 percent to 478.6.

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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.