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Transfer Money to America - US Dollar on the March

Published: 27 Feb at 11 AM Tags: Euro Exchange Rate, Dollar Exchange Rate, Euro Crisis, UK, Economy, Inflation, Spain,

The dollar took centre stage yesterday as the markets swung back into ‘risk aversion’ following the inconclusive result to the Italian general elections.

The dollar also benefited from comments by Federal Reserve Chief Ben Bernanke who assured markets that the central bank would keep its bond-buying programme in place. There had been concern in some quarters that the Fed would wind down its $85 billion per month bond-buying programme or stop it earlier than previously expected. However, in his testimony to the US Senate on Tuesday, Bernanke robustly defended the benefits of the programme on the US economy.

Bernanke said “We do not see the potential costs of the increased risk taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery. Inflation is currently subdued and inflation expectations appear well anchored.”

Meanwhile, the euro fell again against the dollar to a seven week low on the uncertainty surrounding the Italian elections after no political party secured an outright majority in the Italian parliament following the elections last weekend. The results showed that the two leading parties favoured anti-austerity measures, sparking concern about how the government will push through reforms aimed at tackling its budget deficit.

Credit ratings agency Moody’s Investor Services commented yesterday that the uncertainty provoked by the inconclusive elections in Italy are credit negative for the sovereign rating and could cause contagion to other peripheral euro zone countries such as Portugal and Spain.

Despite the concern over the hung Italian parliament, Moody’s took no action on the current ‘Baa2’ Italian rating and the outlook continues to be negative, although it is not on credit watch at this point. This level is two notches above junk bond status.

In the UK, Deputy Governor of the Bank of England (BOE) Paul Tucker in testimony in parliament said that he is open to the possibility of more quantitative easing (QE) in ‘certain circumstances’.

"I remain open to doing more QE depending on the outlook for demand and inflation," said the BOE deputy governor.

Tucker also admitted in his testimony that the BOE is considering the “extraordinary” idea of negative interest rates in the UK as one of a number of radical policies to help return the UK to growth. Tucker raised the possibility, saying the BOE could be doing more to help the economy, including measures to boost lending to small businesses. Negative interest rates would mean that commercial high street banks paying the central bank to place their money with it. The move would be intended to encourage more lending to businesses and households. But it could also lead to a reduction in the interest paid on individual savers’ accounts held with high street banks.

Meanwhile, Chancellor George Osborne was warned to reject renewed calls for a budgetary U-turn because it would jeopardise Britain’s ultra-low bond yields by the European Union’s economic chief Olli Rehn. Rehn, Vice-President of the European Commission said yesterday that the coalition’s deficit-reduction plan remained decisive in locking-in low borrowing costs even as the national debt heads towards economically damaging levels. With European markets again in turmoil after an electoral revolt against austerity in Italy, Rehn also warned that it would take time for the euro zone to win a clean bill of health. He did however insist that the bloc was “out of intensive care”.