Currencies Stabilize After a Sharp Dollar Surge - 23.9.2011

Stock markets collapsed yesterday and the negative tone prevailed in Asian trading hours today. All major US and European stock indices lost more than 3% and 4% respectively on “gloomy” global economic outlook. Declines of Asian stocks on Friday however were not so strong, as finance chiefs from the Group of 20 nations said they would address “heightened downside risks” from sovereign debt and a slowing global economy. The G-20 is “committed to a strong and coordinated international response to address the renewed challenges facing the global economy, notably from heightened downside risks from sovereign stresses, financial-system fragility, market turbulence, weak economic growth and unacceptably high unemployment,” according to a statement released in Washington yesterday. US Dollar The dollar jumped against all its major counterparts yesterday except the Japanese yen, sending the Dollar Index, which tracks the greenback against the currencies of six major US trading partners, to its record high since February 14 – 78.798. Demand for safety US Treasury bonds has also increased dramatically: benchmark 10-year notes yields fell to a record – 1.71%, despite the economy is still showing a weak performance. US home prices declined in the 12 months through July as concerns that the economy may enter another recession sapped the confidence of would-be buyers. Prices dropped by 3.3%, the Federal Housing Finance Agency in Washington said in a report, while the number of initial jobless claims remains high. In comparison with the previous figure applications for jobless benefits decreased by 9000 last week to 423000. US President Barack Obama also said during the annual meeting of the United Nations General Assembly that leaders should take “coordinated action” to prevent the world’s economy from slipping into a recession. “We acted together to avert a depression in 2009” and “We must take urgent and coordinated action once more.” Obama said in his speech yesterday. The European debt crisis will be the main topic of the agenda today during the annual meeting of the International Monetary Fund and World Bank, where finance ministers and central bankers from the Group of 20 nations are expected to discuss possible a coordinated strategy to solve the crisis. Euro The euro depreciated against the greenback and the Japanese yen yesterday. The single currency touched its lowest level against the dollar since January 19 (1.3384) before reversing some of its losses in Asian trading hours today on hopes that international cooperation may stem the crisis. The euro weakened as well after data showed that euro area services and manufacturing output shrank for the first time in more than two years in September. Greek Prime Minister George Papandreou however said that giving up now would be a “catastrophe.” Potential consequences of a national bankruptcy include the failure of the country’s banking system, an even deeper economic contraction and government collapse. Greek Finance Minister Evangelos Venizelos also said yesterday that “People, justifiably, think the crisis is what we’re living now: cuts in wages, pensions and incomes, fewer prospects for the young.” “Unfortunately this isn’t the crisis. This is an attempt, a difficult attempt, to protect ourselves and avert a crisis,” he added. International Monetary Fund Managing Director Christine Lagarde meanwhile said the European Central Bank must continue to provide “solid, reliable” funding for euro-area banks and economies as parliaments in the region pass measures into law to fight the region’s debt crisis. The ECB “plays and can play and I hope will continue to play a critical role,” Lagarde concluded. The euro rose slightly against the dollar in Asian trading hours today, touching 1.3566, but still remains under pressure.