The euro and yen are moving in opposite directions based on market news with the USD in the middle of the battle field. The euro moved slightly lower in midday trading to 1.2728 while the yen strengthened to 83.66.
The weakening euro
The renewed weakening of the euro is partially due to disappointing German factory orders for the month of July which fell by 2.2% instead of an anticipated growth of 0.4%.
The largest factor however can be contributed to the news from Greece who is again nearing a potential default on its Government debt despite the large bailout package and raises the question for the second time this year whether Greece will or should leave the Eurozone.
In an interview with CNBC earlier this morning, Jean-Claude Trichet, ECB President, stated that Greece will not exit and the euro will remain intact.
A less visible reason may well be attributed to the market’s reaction towards the bank stress test earlier this year. While 87 out of the 91 European banks passed the test, some excluded certain Gov’t debt or reduced the amount to offset their short positions, according to a report published by The Journal on Labor Day.
The land of the rising sun
The yen continues to strengthen versus the USD and reached a fifteen year high at 83.66 intra-day on news that the Bank of Japan left its loan facility unchanged. The markets do not anticipate a direct intervention by the BOJ and predict a continued strengthening.
In 2010 the yen has strengthened 15% versus the USD and in the last 120 days has gained 17% versus the euro (see chart above).
Direct market interventions are viewed as artificial and protectionist and such have not been implemented by the BOJ since 2004.
The strong yen puts extra pressure on its already deflationary economy as it pushes export prices higher and may further reduce its weak GDP. The last quarter saw a small growth in GDP of 0.4%.
Precious metals and reserve currencies
As the major reserve currencies battle with the dollar still being the currency of choice and the euro as a close second from a pure reserve perspective, precious metals have certainly joined the game in these uncertain economic times.
Gold has gradually increased in value, despite its retreat in today’s trading, but can be labeled as the number three preferred reserve currency.
White precious metals such as silver, palladium and titanium still lag gold overall but have outperformed gold on a percentage basis.
With China surpassing the US in monthly car sales for the first time, and the expectation that this trend will continue for several years to come, the “white” metals become more interesting as a reserve given their industrial application in the automotive industry, among others.
The behavior of both yen and euro has an impact on their respective durable good output and the pricing of their exports. Both countries would benefit from a weaker currency or a strengthening of the USD to either revamp or stabilize their GDP growth for the foreseeable future.
A normalization and stabilization of international trade would probably require an exchange rate of 1.16 euro/USD and 95-100 yen/USD. This may be achieved through US monetary tightening but it is not expected that the Federal Reserve will make such a shift in the near future.
Written by Nick Doms © 2010, all rights reserved.
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