Neutral observers around the world have poured scorn upon the unfolding developments in Tripoli where Al-Jazeera television states that 250 civilians have already lost their lives. The rising “rivers of blood”, as forecast by President Qaddafi’s son, appear set to burst their banks at any moment as the state unleashes warfare on its own people. The regime is desperately clinging to power by its fingernails using missile-launching warplanes to control its masses. As the violence escalates and the bloodshed worsens, speculators have sent stocks tumbling around the world and are once again making a dash for the safety of the dollar and the havens of the Swiss franc and Japanese yen.
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U.S. Dollar – The security associated with both the dollar and U.S. government debt has caused a bid for the greenback as markets respond to an escalation of weekend violence in Libya. Colonel Qaddafi’s violent regime is cracking under pressure once again and is geo-politically sensitive on account of the fact that it controls the largest oil reserves across Africa. Following the overthrow of the Egyptian regime, the protests have turned violent over the border with change clearly on the peoples’ agenda. The dollar index is well off its overnight highs, although it still remains bid on the day. The index earlier reached 78.34 but lately traded at 77.77. The unit faces the Richmond Fed’s manufacturing index, which traders expect will remain unchanged at an index reading of 18. Meanwhile, consumer confidence is anticipated to have risen from 60 to 65. Some of the pullback in the dollar’s value is on account of morning comments from a governing council member at the ECB.
Euro – Yves Mersch warned that interest rates would likely rise in the Eurozone, although without providing a time frame. Based on the clear recent trend of rising prices Mersch stated that he wouldn’t be surprised if his colleagues at the central bank also concluded that upside risks exist to price stability. He left the carrot dangling by saying that a rebalancing of monetary policy was inevitable. His words sparked a surge in the value of the euro, which had earlier touched $1.3525, sending it higher on the day to $1.3685. The single currency had weakened at the expense of a flight to quality but also weakened in response to a ravaging for Angela Merkel’s CDU party over the weekend. Seven state elections are to be held this year and her ruling party is struggling behind the battle to control the negotiations to build a lasting solution for the euro and the bailout fund. Risks are rising as the March 24-25 dateline approaches when ministers will meet to forge a lasting solution. The loss of political support at a grassroots level was heard loud and clear over the weekend when Chancellor Merkel lost control of Hamburg for the first time in a decade. Unfortunately for Merkel, the EU summit is sandwiched by further state elections.
British pound – The British pound shed about a penny to $1.6132 overnight in response to the flight to more secure safety plays despite a dash of bright news for national finances. While January is the single-biggest tax collection month of the year, the reversal of fortunes was eye-catching. The PSNCR reversed from a December deficit of £25.4 billion to a surplus of £14.4 billion, which means that the government’s repaid £5.3 billion during the month, helping Prime Minister Cameron’s conservatives towards the goal of bringing a staggering budget deficit to less than 2% as a portion of GDP within five years. The pound is weaker against a firmer euro at 84.68 pence and lately traded at $1.6162 against the dollar.
Japanese yen – Moody’s Investor Services followed the lead taken by fellow ratings-agent Standard & Poor’s as it downgraded the outlook for Japan’s debt. Last month S&P pointed to a lack of a coherent debt-management strategy for reining in its debt profile as reason for the downgrade. Earlier in Tokyo, at an event sponsored by the Forex Club of Japan, former Finance Minister and influential speaker Eisuke Sakakibara predicted that the yen would reach new all-time highs against the dollar. He urged his successor Yoshikito Noda to embrace a further yen strengthening and label a strong yen as being in the interests of Japan. Formerly known as Mr. Yen for his ability to influence the value of the domestic currency, Mr. Sakakibara noted that American preeminence of the global economy was disappearing as “businesses remain saddled with bad loans and households with bad debts.” He also noted that Europe was collapsing under the weight of peripheral nations’ problems. Sakakibara also said that the shift of economic power to Asia would continue to bolster regional currencies against the ailing dollar and euro. The yen failed to maintain its earlier strength and gave up an advance to ¥82.79 before trading at an unchanged ¥83.14 before the release of U.S. data.
Aussie dollar – The Aussie was a clear loser overnight as risk appetite fell off a cliff. There was also regional bad news from a bad earthquake near Christchurch in New Zealand, which will further hamper growth. The Aussie also eased following a National Australia Bank measure of consumer confidence, which eased to an index reading of five for the fourth quarter from a reading of nine in Q3.
Canadian dollar – The bout of risk aversion weighed on the Canadian unit, especially following a report for December showing weaker-than-expected retail sales. Stores sold 0.2% fewer goods in the final month of the year dashing hopes that the trade sold at least as much as during November although sales were simultaneously revised higher during that month. The report had some influence on the local dollar, which traded lower against the greenback to purchase $1.0112 from $1.0175 earlier.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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