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Weak Housing Data Sends Dollar Reeling

A dollar already wavering under the lack of definition of the stimulus program by the Federal Reserve took another hit on Friday with disappointing housing data. Existing home sales plunged 13.4 percent in July as June and May sales data was also pared significantly. The Commerce Department’s monthly existing home sales report indicated a deeper than expected schism in the important housing sector and may point to a disappointing third quarter growth rate.

The slumping sales are attributed to rising interest rates and other factors. Surprisingly, sales in the Northeast were the only bright spot in a bleak national report. The higher interest rates climb, the bigger the toll on existing and new construction home sales. Analysts speculated that the upwards spike in June and May was the result of fear over rising rates.

Upon release of the Commerce Department report, yields on government debt lowered and the dollar weakened. Relative improvement in housing was one of the factors considered by the Fed in determining when and to what extent tapering will begin. The data suggests the Federal Reserve will not begin tapering in September, which was the expected date anticipated by analysts.

Mortgage rates have increased sharply since May. One of the benefits of the bond buying program has been the lowering of interest rates. The new data points out the flimsy nature of the recovery as well as the need for a policy statement by the Federal Reserve.

In July, the median sales price of an existing home in the US was $257,200, a healthy increase from July 2012 when the median selling price was $237,400. The number of homes sold in June marked a three-year high. In June, inventory would have been sold out within 4.3 months. After the disappointing sales in July, existing inventory would take 5.2 months to clear.

Euro Continues Rise

The ECB announced that rates would not change. Stronger-than- expected-growth in Germany has bolstered the euro and increased Chancellor Angela Merkel’s chance for re-election. Most of the growth in Germany was attributed to strong national spending.

The euro rose to $1.34. The dollar came back later in the day, settling at $1.33. Earlier in the week, the euro reached a six-month high at $1.3453. More troublesome were indications that investors were selling dollars to acquire the Swiss franc and the Australian dollar. Recent economic data from the euro zone is favorable as the region has climbed out of recession despite the weakness of the southern tier.

The dollar fell 0.2 percent against a basket of six major currencies upon the release of the housing data.

Against the yen, the USD retreated to 98.59 after reaching a three-week high at 99.15. The dollar has gained 13.7 percent against the yen in 2013. The difference between the 2-year treasury and the 2-year Japanese government bond still decidedly favors US investment. Indications are that Japanese investors are trending to US Treasuries.

Analysts have been speculating about the amount of the tapering when the Fed does initiate the slowing of the bind purchase program. The consensus is that the initial tapering level will be about $10 billion per month less than the current level. This does not appear to be a reduction that should be holding global markets at bay.

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Nervous Markets Await Fed and Employment

Nervous global markets anxiously await news from the US Federal Reserve and the new Labor Department unemployment data to be released on Friday. Improved data from Europe boosted European equity markets and raised the euro against the USD as the dollar regained footing against the yen.

Markets appear edgy about what Federal Reserve Chairman Ben Bernanke will announce regarding the possible tapering of the current stimulus. Most likely the news will be tempered at best. With unfavorable growth in GDP expected and with modest gains of about 185,000 new jobs expected, there simply is not enough impetus for the Fed to alter policy significantly, if at all. A gain of 185,000 jobs would trim unemployment to 7.5 percent, a step in the right direction but not a level likely to dissuade the Fed.

On Tuesday, US equities continued paring down but are poised to post record gains for the month. Eight of ten S&P 500 sectors declined for the day. All three major indices lost ground Tuesday. Yet, equities are ready to close the month with the sharpest gains since October, 2011. Early Wednesday trading indicated a rally in equities.

Also of interest to Wall Street is the successor to Chairman Bernanke. President Obama’s choice will likely influence markets with hawks boosting markets and selection of a dove bolstering the dollar.

The European Central Bank (ECB) is meeting this week and new forward guidance is expected from the ECB and from the Bank of England (BOE). The euro and the pound have strengthened in anticipation of new guidance and in response to encouraging data.

European equity markets closed flat for the day but the MSCI index of world stocks fell 0.5 percent.

Dollar Nervous

The dollar gained some strength overnight but slumped 0.5 percent against the yen on Tuesday to 97.93. Just last week, the dollar hit new highs against the yen. The dollar index briefly touched a five week low at 81.785.

Lee Hartman, a currency strategist with the bank of Tokyo explained; “The dollar faces a lot of key event risk in the week ahead with the release of the U.S. Q2 GDP report and the latest FOMC policy meeting on Wednesday, followed by the release of the U.S. employment report for July on Friday.”

The 10-year Treasury notes fell 3/32 with yields closing at 2.57 percent on Friday. Over the last two weeks, yields have ranged from a low of 2.l3 percent to a high of 2.63 percent, uncommon volatility. On July 8, 2013, yields hit 2.78 percent, a two-year high.

The German bund ended a comfortable bounce with a decline on Tuesday. Disappointing trade caused the decline.

Japan’s Nikkei touched a three-week low, sliding 3.3 percent. The stronger yen and poor data from Japan’s exporters hit equities unusually hard. The possibility of a new sales tax is weighing heavily on Japan’s economy.

Latin American Currencies

As the USD has strengthened and become more appealing to foreign investors seeking quality, Latin American currencies have suffered. As the Fed has considered tapering, Latin American currencies have fallen sharply over the past two weeks. A number of factors could continue to impact these currencies negatively in coming months.

Brazil’s industry index slumped to its lowest level in four years. The Brazilian real lost 0.4 percent on Tuesday on a sharp plunge in industry confidence.

  • The Mexican peso slid 0.6 percent to 12.7555 per USD, a two-week low.
  • The Chilean peso lost 0.7 percent to 511 USD, a one-month low.
  •  The Argentine peso shed 0.58 percent to 8.61 USD and has lost 21.25 percent this year.
  • The Mexican peso slid 0.6 percent to 12.7555 per USD, a two-week low
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Greece, Portugal, Spain Wavering

Greece, Portugal and Spain headline separate financial woes in the euro zone’s southern tier but there are other stress points that the Troika (EU-IMF-ECB) will need to put to rest to keep the bailouts for the three countries intact. As usual, Greece faces the biggest and most immediate challenges.

Greece is scheduled to redeem 2.2 billion euros in bonds in August. If Athens fails, the IMF would have to violate its rules to standby its commitment to the 240-billion-euro bailout scheme. IMF rules require a borrower to be financed one year ahead of schedule.

An IMF pullout would be disastrous to the euro and euro zone. Lenders are unhappy about Greece’s faltering efforts, a missed June deadline and lack of austerity. But, other aspects of the southern tier countries are also falling apart.

In Portugal, highly regarded Finance Minister Vitor Gaspar, who has been in favor with the Troika and is the recognized architect of the country’s austerity program, resigned on Monday. The country had a strategy to exit the EU/IMF bailout but those plans may be dissipating.

In Italy, political tensions are heightened. Prime Minister Enrico Letta was forced to call a government meeting after a coalition partner threatened to withdraw support for the austerity plan. Investors are anxiously following Italy as are members of the Troika.

Greece’s recent efforts to close spending nearly closed another prolonged government shutdown. The closing of the public radio station, ERT, seemed the most sensible and painless means to meet a government reduction deadline.

Greece missed a June deadline to put 12,500 workers into a “mobility scheme,” whereby they would be transferred or terminated within 12 months. Adding to the problem is that the state-run health insurer, EOPYY, has suffered an unexpected 1 billion euro shortfall. Deeper spending cuts are the only means to reduce the shortfall.

Greece has also failed to liquidate certain public assets, most notably the sale of the government-run gas company. Amidst this chaos, Prime Minister Antonius Samaras has declared that no new austerity cuts will be implemented.

Greece’s unemployment rate is now 27 percent. The country has lost 33 percent of its disposable income. Despite all this data, the euro remains solid against the dollar and the yen.

Currency Shifts  

The dollar achieved four-week highs against a basket of currencies. US ten-year bonds were steady at 2.48 and luring investors back to the market.

The dollar also continued its climb against the yen. The yen remains under pressure from the Bank of Japan’s aggressive stimulus program but is also reflecting concerns about Asian economies and emerging economies in general. China’s slowdown is affecting all economies and currencies at emerging economies are suffering as a result. The dollar settled at 99.87 yen.

The euro held above the $1.30 mark settling at $1.3062, below the 200-day average of $1.3074. Against the yen, the euro reached a three-week high of 130.485.

The Australian dollar slumped 0.7 percent to $0.9172 upon news that the currency has fallen 13 percent against the USD. The cash rate set by the RBA stayed at 2.75 percent for the second month in succession.

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Cyprus, ECB and BoJ Weigh On Markets

As details of the Memorandum of Understanding (MoU) between government and the “Supreme Savings‘ international lenders” were revealed on Tuesday, markets stepped back to gauge the 10 billion euro bailout. Markets also slowed in anticipation of this week’s updates from the Bank of Japan (BoJ) and the European Central Bank (ECB). Investors are concerned about whether the BoJ will scale down its proposed easing initiative. At the same time, the ECB will need to calm investor fears in the wake of the Cyprus fiasco that cost international investors billions of euros.

One of the big concerns facing the euro zone and the European Union is whether the Cyprus model is the model that could befall Spain and Italy. A general lack of confidence in the EU has led to the paring of the euro. Investors are unclear as to the direction of the BoJ and the USD rose to its highest level in two weeks against the yen.

Cyprus Turnaround Outlined

The MoU leaves little doubt about what the bailout investors, who contributed 10 billion euros to the troubled banking sector, will require of Cyprus. Meanwhile, the former finance minister resigned in anticipation of legal action for his roll as President of the country’s second largest bank, which failed last week.

As if there was not enough disgruntlement on the island nation, Cypriots are now staring at some lofty goals that are likely to impose the similar austerity sanctions other southern tier euro zone neighbors face.

The MoU says Cyprus must attain a four percent of GDP primary surplus by fiscal year 2017. This would a significant turnaround.

Reuters reports there are a number of other goals established by the MoU:

  • In 2013, Cyprus will suffer a 395 million euro budget shortfall (2.4 percent of GDP) in 2013.
  • This shortfall exceeded the 1.9 percent deficit in 2012.
  • In 2014, the deficit will expand further to 678 million euros.
  • The MoU expects the deficit to pare down to 344 million (2.1 percent GDP) by 2015.
  • In 2016, Cyprus is charged to achieve a primary surplus of 204 million euros (1.2 percent GDP) by 2016.
  • By 2017, Cyprus must achieve a 4 percent surplus by 2017.
  • Growth in Cyprus will contract by 8 percent this year.
  • Growth in Cyprus will contract 3 percent in 2014.
  • Growth will finally increase by 1 percent in 2015 and 2016.

In light of these assumptions, Cyprus has much work to do to live up to expectations. The 8 percent paring of GDP suggests a good amount of austerity will be necessary and Cypriots have thus far rejected most EU initiatives.

The MoU states that Cyprus will earn about 1.4 billion euros by selling certain state-owned assets, such as state-owned telecoms. Additionally, Cyprus expects to realize revenue from selling off rights to undersea natural gas deposits, which have been found of the island coastline.

The future of the public sector will be under pressure with new actions taken by government. The banking sector employment is already in turmoil. Now, government has announced that public sector pensions are frozen. The retirement age will be raised by 2 years. New taxes will be imposed upon alcohol, tobacco products and petrol. The VAT will be increased and corporate taxes on earnings and on interests earnings will also rise. Fees for all government services will increase by 17 percent effective immediately.

These measures are designed to ensure that debt in Cyprus is at 100 percent by 2020.

The ECB, BoJ and BoE

Investors are anxiously awaiting results from the three central banks. There are concerns that the BoJ will scale back on its proposed quantitative easing policy.

The ECB is now expected to hold steady on current interest rates. Prior to the Cyprus crisis, it was projected that the EC would raise interest rates.

In England, the BoE is expected to continue its current purchase of asset program without increasing the stimulus. British sterling gave back recent gains in anticipation of the upcoming central bank meeting. It is nervous times on the currency front.

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Cyprus Sinks Euro, Russian Investors

The euro was dealt another blow over the weekend when the island nation of Cyprus needed emergency bailout funds to sustain the country’s banks. Residents of Cyprus did not wait for the political outcome and drained ATMs of all available cash. Meanwhile, the country declared Monday and Tuesday bank holidays, giving Parliament time to shape a bailout plan.

However, the 56-member Cypriot Parliament is as dysfunctional as a Parliament can get. No single party has a majority and three parties have already said they will not approve the proposed tax levy system suggested by Brussels over the weekend. This caused the expected Sunday vote to be postponed until Tuesday, prompting a run on ATMs.

The weekend plan calls for Cyprus to impose a tax on bank accounts in the country’s banks. This would raise a healthy portion of a 7 billion euros and would be added to another 10 billion euros furnished by the ECB. The country, long believed to be a primary source for money-laundering activities, has established itself as an attractive offshore safe haven because of its policy of tax-free savings.

Once preliminary resistance to the proposed levy was voiced, government authorities were swamped with dissenters. The original proposal called for imposition of a tax amounting to 6.7 percent on bank deposits under 100,000 euros and a tax of 9.9 percent on deposits over 100,000 euros.

Some officials immediately began talks of tax-free deposits in the range of 20,000 euros or less, a reduction to 3.0 percent on deposits less than 100,000 and an increase in the tax on deposits greater than 100,000 euros to 12.5 percent.

Joerg Asmnussen, a key ECB negotiator in Brussels over the weekend responded, “It is up to the government alone to decide if it wants to change the structure of the contribution (from) the banking sector. The important thing is that the financial contribution of 5.8 billion euros remains.”

While the intent of the levy is clear, the act may send waves of doubt to other offshore banking countries inside and outside the EU. Additionally, banks in countries like Spain and Italy may also feel pressure from concerned investors.

EU officials were firm that this was a one-off solution but the Cyprus crisis underscores the continued instability in the region’s banking industry. The euro and European equity markets fell sharply off the news. US equities opened lower but were staging a rally by midday.

Russians Burned

While Parliament considers various courses of action, central bank governor, Panicos Demetriaces asked the important question, “The most important question is what would happen the following day if the bill isn’t voted. What would certainly happen is that our two big banks would need to be consolidated. This doesn’t mean that they would be completely destroyed. We will aim for this to happen in a completely orderly way.”

The possibility of a banking collapse would weigh heavily on Russia whose investors have as much money on deposit in the country as all other international and national investors. Russia has been considering a 2.5 billion euro loan to help the country’s banks but has been slow to pull the trigger.

Many of Russia’s wealthiest investors have money in Cyprus banks. Russian President Vladimir Putin opposes the tax wholeheartedly describing it as, “unfair, unprofessional and dangerous.”

Half of the 70 billion euros in Cyprus banks are from internationals with the largest depositors being from Russia. According to Moody’s, at the close of 2012, Russian banks had $12 billion invested in Cyprus banks while private Russians had another $19 billion in the banks.

EU officials have said they expect Russia to extend the proposed 2.5 billion euro loan. If these funds are not forthcoming, the tax bite might well increase.

What markets are wary of is if this type solution could be implemented in other European banking sectors. The levy would be a blow to internationals who believe their money is safer in foreign banks. Cyprus made a determination to be a financial center where discretion rules and tax policy was most favorable to investors.

However, the bigger issue is that there is one more unexpected crisis in an unsettled economic area. Look for the euro to fall sharply in upcoming sessions.

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Troubling Data Across The Board

Politics continued to plague the euro zone and US economies and China’s rising housing crisis added fuel to the fire as currency markets trembled under the weight. European and Asian equity markets slipped on Monday as the US markets trended down by midday.

The euro slumped to 1.30USD. Britain’s pound slumped to a 2-year low against the yen and to 1.50USD on Monday.

In the euro zone, the lack of resolution to last week’s elections had markets on edge. The yield on Italian bonds rose, but the lack of a permanent government has many economists worried about how ECB Chairman Mario Draghi can help the struggling economy. Without a government, no commitment of austerity can be made to the ECB thus sealing off the infusion of more euros.

In the US, markets received the news of the sequester without blinking but by Monday a sobering tone was noted in Washington. President Obama reached out to Congressional Republicans and to Democrats in the hopes of composing middle ground legislation.

Obama apparently asked for consideration of a new direction for the massive spending cuts, specifically throwing entitlement reform and tax reform on the table.  Several Republican s have said they would consider closing some tax loopholes as long as entitlement reform is art of the package.

Public consensus is that the US must deal every aspect of the entitlement scenario. A lack of progress will certainly affect every sector of the US economy.

A revealing report from China on 60-Minutes confirmed what many analysts already realize. The Chinese construction market is overdue for a slowdown. 60-Minutes showed cities of unoccupied, new housing. All apartments in the massive buildings are sold but they remain vacant, unaffordable for the majority of the population.

On Sunday, China announced that its residential construction sector had slowed to its lowest activity in five years. China added more damaging data indicating that factory output slowed to multi-month lows in February.

China is already curtailing its ever expanding residential development but the effects have yet to be felt. This could be a housing bubble that has the potential to dwarf the US housing collapse.

In the UK, the pound fell because of reaction to a decline in the construction industry. This decline could push the country into its third recession in five years.

The data has supported the Bank of England’s cries for further quantitative easing, but there is unrest throughout the economy. Ian Stannard, the Head of European FX Strategy at Morgan Stanley explained, “The construction PMI today was quite weak, but the really big one is the services PMI which comes tomorrow and if that comes in weak as well it would increase the possibility of further action at this week’s BoE meeting.”

Forecasts for a global slowing in 2013 seem more likely now that politics has entered the economic fray.

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Euro Slides, Dollar Rises, Italy Plays With Fire

On Friday, the euro fell to its lowest rate against the USD since January 10 and to its lowest point against the yen in three weeks. A number of factors came together to keep the euro in a steady slide and the yen on a steady rise.

In Europe, the euro zone’s 17-member nations released economic information that painted a bleak picture for the region during 2013. Only Germany seemed to discount the overwhelming evidence of another recession. The German confidence index climbed for the fourth straight month, despite a dismal finish to 2012 and data suggesting manufacturing in the country and the region was dialing down.

The euro fell to $1.3166, well below the 15-month peak of $1,3711

The euro fell to 122.23 yen, down  1.4 percent

The dollar index struck a five-month high at 81.508.

In addition to projections that euro zone unemployment would remain in the 12 percent range for 2013 and that Spain’s unemployment rate would stay at 20 percent, there were other factors that are too unsettling to overlook. The ECB had anticipated banks would  pay back 131 billion euro of borrowed funding but fell far short of the mark, repaying just 61 billion euros on Thursday.

Spain announced the country would fall far short of its debt reduction goals in 2012 and well below euro zone requirements. The events in Spain and Italy should be observed by US politicians as examples of what happens when politics and economic concerns face off against each other.

Recent production numbers from the US indicate that businesses are uneasy about how politicians will handle the sequestration due to fall off the March 1st cliff on Friday, March 1, 2013. Coupling this event with the upcoming debt ceiling expiration, the stage is set for a perfect storm that will leave the middle class crippled and the country mired in what will surely become another recession.

And, the political rhetoric in Washington marches on.

On Thursday, minutes from the Federal Reserve’s January meeting were released. The possibility that the Fed will raise interest rates earlier than expected strengthened the dollar against the declining euro.

In addition to the economic woes in Europe, the political theater is unnerving economies outside the region. The amazing but disturbing popularity of Italian bad boy and financial nightmare Silvio Berlusconi have shaken confidence in Italy’s future and thus the future of the euro zone.

Is it possible that the regions third largest economy could turn a blind eye to the unscrupulous Berlusconi? Apparently so as the former Prime Minister is locked in a three way run between himself, current prime minister Mario Monte and Luigi Bersani.

Many economists hold Berlusconi responsible for the lax financial oversight that sank the nation’s economy. However, Italians seem to prefer the wayward ways to the disciplined approach to correction that Monti has advocated.

The euro zone produces 20 percent of the global output. The European Commission said that the euro zone will not return to growth until 2014, dimming hopes of China and the US for their export markets.

Across the region, consumer inflation could deal another blow to the economy. Projection call for an inflation rate increase to 1.8 percent in 2013.

In Washington, Congress returned and seemed undisturbed by the pending negotiations that could set the country back into recession in a very short time. The inability of Congress to put their political rhetoric aside and act responsibly has been repressing the economy since the fourth quarter 2012.

On Thursday, new unemployment claims surpassed analyst expectations as signs of the political weight on the economy continue to mount.

It appears President Obama will stick to his word on reducing spending and increasing taxes. Republicans can move to the middle or cause another economic collapse. If so, it may be 2014 before Democrats regain the house and finally accomplish meaningful legislation about jobs, guns and immigration.







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Currency Manipulation Questioned At G-7

As an anxious world awaits President Obama’s State of The Union address, a bitter game of cat and mouse seems to be circulating global currency markets. At the center of the controversy is Japan’s yen causing the Group of Seven nations to call for cessation of devaluing of currencies to gain trade advantages.

Of late, currency markets have been volatile. As the USD has given ground to the euro, the euro has also soared against the yen. The euro has gained 24 percent against the yen in just three months. China has long been accused of manipulating its currency and international tensions are high.

Mario Draghi of the ECB spoke on Tuesday saying that exchange rates are equally important for growth and stability. Japan has implemented a large quantitative easing initiative that has lowered the US policy of continuing assistance from the Federal Reserve have kept the two currencies at low levels.

The US has made headway in its trade balance in the past two months with December closing the imbalance to its lowest level since the mid 1990’s. China also rode a strong export balance to its main buyers the US and Europe to a big spike in its January GDP.

Draghi said that he believes Spain is “on the right track” towards economic recovery. Meanwhile, Italy captured a significant windfall from its 2012 property tax enforcement. Italy collected 23.7 billion euros in property taxes, surpassing Treasury’s estimate by 1.2 billion euros.

It is expected that the windfall will be used to reduce the nation’s budget deficit below 3 percent of 2012 GDP. The target was 2.6 percent but analysts think that bar will not be achieved even with the windfall. The 2012 annual review will be published on march 1, 2013.

The US, Britain, France, Germany, Japan, Canada and Italy, the member nations of the G-7, was called to consider Tokyo’s expansive monetary policy. Reuters quoted a spokesperson for the G-7 as saying; “The G7 statement signaled concern about excess moves in the yen. The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend.”

The G20 finance ministers are scheduled to convene in Moscow this weekend. It is a full plate this time around and currency valuations will be at the fore.

Britain heads the G-8 which includes the G-7 nations and Russia and released a statement saying that as far as Britain’s easing and restructuring: “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” This is the intent of easing to assist national economies meet oppressive challenges.

Japan’s Finance Minister, Taro Aso, insists that the country’s policy is aimed at reviving the stagnant economy. It is unclear what leverage the G-20 has to stabilize the disparities.

Japan gained support for the US when Treasury official Lael Brainard told the media that the US recognized Tokyo as easing efforts as a remedy for the lackluster economy with massive unemployment.

Regarding the euro, France has been most vocal about setting a large for the currency that does not yield a competitive edge. Many euro members have concerns about the exchange rate but Germany lowered the anchor on such speculation. Finance minister Wolfgang Schaeuble said, “There’s no foreign exchange problem in Europe. There are concerns that there could be something like this in other parts of the world.”

Since December 2012, the euro has climbed 10 cents against the USD. This is the effect of the ECB tightening its balance sheet while Japan and the US continue to expand their easing programs.

Analysts hope that the President’s State of the Union will pave the way for a political compromise to reduce the deficit in reasonable terms and engage the public sector in a powerful growth initiative.

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US Progresses, Euro Soars

A number of economic reports showed a positive trend for the recovering US economy while actions from the ECB raised the euro above the 1.35USD benchmark. The Labor Department reported that initial claims for unemployment last week rose by 38,000 to 368,000. This figure comes on the heels of a week where new claims were at their lowest level in five years. This figure was slightly above analyst’s projections but well within a range to suggest the paper-thin recovery had momentum.

Employment has been robust in January with 160,000 new jobs already filled. The total for December was 155,000.

Perhaps the most interesting and positive fact is the increase in personal income on December. The Commerce Department reported that personal income rose by 2.6 percent in December. This figure far surpassed the projected 0.8 percent gain.

However, much of this gain may be attributable to advance payments made by US corporations prior to December 31, the end of the tax year when Tax policy was unclear. Consumer spending fell just short of expectations rising by 0.2 percent.

Importantly, planned layoffs declined in December. This is the first decline in four months. December job cuts totaled 32,556, a sharp decline from November’s 57,081 job cuts, a 41 percent improvement.

Euro Continues Surge Against Dollar

The euro continued an impressive upward trend against the dollar as the European Central Bank (ECB) said that 137 billion euros would be repaid to the bank on the earliest due date. These payments are in the bank’s three-year loan program.

President Mario Draghi’s aggressive three-year loan program is credited with stabilizing the banking and credit crisis in the euro zone. The ECB will announce its second payment date on Friday. This will allow banks to properly assess their capital needs and liquidity.

The move to repay suggests that the borrowing banks have stabilized and that they have sufficient liquidity to meet their operating costs. The repayment is likely to be interpreted as an endorsement for higher interest rate, a consideration the ECB will likely determined after the next tranche.

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Euro Roars Back

On Tuesday, euro zone banks borrowed fewer euros than was borrowed last week from the European Central Bank (ECB). The total of the ECB’s weekly loan program was 124 billion euros less than the previous week. Coupled with the news that banks would be prematurely repaying the ECB 137.2 euros in emergency three-year loans, the currency rate moved higher. Euro Zone banks appear to have made great strides toward solvency.

When encouraging data from Germany was reported, the euro rose to 4-year highs against the dollar and yen Tuesday morning. Overall, there is more stability in the region than has existed since 2008.

The rise comes in advance of Wednesday’s release from the ECB about the demand for three-month loans. Industry analysts expect euro zone banks seeking liquidity will need about 10 billion euros for the three month cycle.

Overall, the banking news from the euro zone shows promise. The three-year loan scheme has been credited with stabilizing the region’s banks through 2011 and 2012. In this more liquid environment, three-year funding costs are expected to rise.

Wednesday is the first day that banks are eligible to repay the initial loans on a weekly basis. The second level of reduction is due on February 27.

Euro Gaining

The euro reached 14-month highs against the USD and yen on Tuesday.  Positive banking news and strong data from Germany were the primary rallying points. However, the euro gained more strength when US consumer confidence improved. The euro zone and EU rely on US consumer confidence to spur exports.

Germany’s positive manufacturing data and the banking progress have boosted the euro to impressive, steady gains. The trend has been upward since the fiscal cliff negotiations in the US resulted in a meaningless effort at conciliation between the two political parties.

It is expected that the US Federal Reserve will continue its quantitative easing scheme well into 2013. This aggressive easing policy will further weaken the USD. The Fed will commence a two-day meeting on Wednesday and analysts are anxiously awaiting new policy changes. With 11 million Americans unemployed, the Fed is unlikely to rock the boat.

The euro hit $1.3493 in morning trading. That marks the highest level since December 2011. Meanwhile, the dollar slipped 0.3 percent to 90.60 yen. This trend is contrary to analyst’s projections. There appears to be demand for the yen at 88 yen–to-dollar.




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