Italy’s Rating Cut By S&P - 20.9.2011

US Dollar The dollar strengthened against its major counterparts yesterday, except the Japanese yen, pushing the dollar index, which tracks the unit against a basket of six currencies, to 77.51 from 76.06 last week. Obama yesterday announced his 1.5 trillion-dollar plan of tax increases over the next decade, while opposition expressed concerns that higher taxes may threaten the weak economic growth. Due to an absence of important macroeconomic data yesterday, the greenback was mainly driven by external factors and by its status of the world reserve currency. Demand for the dollar increased after Standard & Poor’s cut Italy’s credit rating, adding to concern Europe’s worsening debt crisis will raise borrowing costs for countries in the region. US government bond yields fell on the contrary, with the benchmark 10-year yield plunging below 2%. Today the Fed officials begin a two-day meeting to decide on the interest rate level and to discuss possible tools to boost the economy. Moreover reports today may show that both housing starts and building permits dropped in August by 2.3% and 1.8% respectively. Euro The euro fell for a third day against the dollar and the Japanese yen after the Italy’s credit rating cut to “A” from “A+” by S&P yesterday. The agency explained that Italy’s net general government debt is the highest among “A” rated nations and that it may peak even higher than it was previously estimated. “Italy’s economic growth prospects are weakening and we expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said. The country’s GDP expanded by 0.3% in the second quarter after a 0.1% increase in the first, while a record 1.9 trillion-euro public debt, which is bigger than the combined debts of Greece, Spain, Portugal and Ireland, is expected to reach 120% of GDP in 2011. The single currency failed to find support despite the Greek Finance Ministry said in a statement that it held “productive” and “substantive” discussions with European Union and International Monetary Fund officials about weather Greece meets the requirements to receive the next part of financial aid. It also said that discussions with its creditors will continue today. German economic reports today are forecast to show a decline in investor confidence. Investors’ confidence, measured by the Center for European Economic Research (ZEW) and aimed to show a medium-term forecast of economic situation, fell to minus 45 from minus 37.6 in August, according to preliminary estimations. That would be the lowest since December 2008. The euro, having little support, fell in Asian trading hours today toward its last week’s seven-month low (1.3495) from 1.3681 to 1.3593 against the dollar. Australian Dollar The Aussie extended yesterday’s losses against the greenback on risk aversion, despite the Reserve Bank of Australia said it was well positioned to respond to global and domestic economic risks or the threat of an acceleration of inflation, according to the minutes of the central bank’s policy meeting held on September 6, when the target rate was kept unchanged at 4.75%. “Members considered that the current setting of monetary policy left the board well placed to respond to evolving global and domestic economic conditions,” the minutes showed. However the minutes revealed that “The near-term growth outlook looked somewhat weaker than had been expected earlier, but the medium-term outlook still appeared positive, providing that the world economic outlook did not continue to deteriorate.” The Australian dollar touched today its lowest level since August 11 – 1.0242.