Last week the US Federal Reserve reduced its monthly bond purchases from $85bn to $75bn, the first step towards undoing the extraordinary stimulus that the Fed Chairman Bernanke initiated to help the US economy recover from the worst recession since more than 80-years.
The decision came after an “improved outlook for the jobs market”, as stated by Bernanke. The US Dollar gained significantly against most of its major counterparts, after the US announced the beginning of the reduction of the QE programme, which is seen to have debased the US currency, reinforcing prospects that the world’s largest economy is improving.
The move also prompted investors to take on more risk as the Fed improved their outlook for the economy, pushing stocks to reach record highs. The Dow Jones Industrial Average rose by 292.71 points to touch a high of 16,174.05, while the S&P 500 rose to a high of 1,811.08 following the Fed’s announcement.
The dollar maintained its strong footing despite a higher-than-expected surge in initial jobless claims. The euro started the week at 1.3735 and reached a high of 1.3811. The single currency then quickly dropped against the US dollar amid the Fed’s tapering announcement and after S&P’s downgrade of the European Union’s long-term rating. The Fed’s decision signals improvement in the labour market signalling higher rates in the near future, which boosted the US dollar against the single currency. on the other hand, the eurozone’s lackluster economic recovery forces the European Central Bank to keep rates at historical lows driving the Euro lower. The single currency dropped to a low of 1.3623 and closed the week at 1.3671.
The pound also dropped against the greenback amid the Fed’s decision. However, the currency maintained its strong footing and closed the week higher. The pound opened the week at 1.6294 and surged to a high of 1.6483 amid volatile trading during the Fed’s announcement. The currency reached a low of 1.6219 for the week and closed at 1.6333.
The Japanese Yen continued to drop against the US Dollar as the BoJ kept their monetary policy unchanged. The central bank also maintained its view that the economy is continuing to recover moderately. The greenback reached 104.59, a five year high against the yen. Additionally, the market is expecting the BoJ to continue its ultra-easy monetary policy in spite of the Fed’s decision. The pair opened the week at 103.13 and dropped to a low of 102.47. the Dollar then surged to 104.59 and closed the week at 104.07.
The Australian dollar was one of the biggest losers last week. The Aussie opened the week at 0.8946 and dropped to a low 0.8820, a 3½-year low. The currency traded near its low on Friday and closed the week at 0.88XX.
Unchanged consumer prices: The US cost of living was unchanged in November, signaling that it will take time for inflation to approach the level desired by Federal Reserve officials. Lower petrol, new cars and clothing prices held the consumer-price index unchanged.
Existing home sales decline: Previously owned US home sales declined for the third consecutive month in November to the lowest level of the year as rising mortgage rates and a limited supply of properties discouraged buyers. Purchases dropped 4.3 percent to a 4.9 million annual rate, the National Association of Realtors said.
Unemployment claims rise: Jobless claims climbed by 10,000 to 379,000 in the previous session, the most since the end of March.
Europe
German investor confidence rises: German investor confidence rose for a fifth month in December to the highest level in more than seven years, adding to signs that the recovery in Europe’s largest economy is strengthening. The ZEW Economic sentiment index of investor and analyst expectations, which aims to predict economic developments six months in advance, jumped to 62.0 from 54.6 in November.
EU loses triple A rating: The European Union lost its top credit rating from Standard & Poor’s, which cited the deteriorating creditworthiness of the bloc’s 28 member nations. S&P cut its long-term rating on the EU to AA+, with a stable outlook, from AAA and maintained its short-term rating at A-1+.
United Kingdom
Inflation closer to BoE’s target:
UK inflation unexpectedly slowed in November to the least in four years, moving closer to the Bank of England’s 2 percent target. Consumer prices rose 2.1 percent from a year earlier compared with 2.2 percent the previous month. A separate report showed annual producer-price inflation stayed at the lowest since October 2009.
BoE minutes: The nine-member MPC was unanimous in voting to keep interest rates on hold at 0.5 percent and to leave the central bank’s £375bn of bond purchases unchanged. The policy makers said stronger a Sterling, and government steps at the start of December to limit household energy bill rises, had improved the inflation outlook.
Inflation could hit its 2 percent target for the first time in over four years early in 2014, the minutes said, as smaller rises in utility bills could reduce inflation by 0.15 percent compared to previous forecasts. Britain’s economy has strengthened since August, with 0.8 percent growth in the third quarter, and the BoE predicts expansion of 2.8 percent next year, above the long-run average. However, output is still 2.5 percent below its pre-crisis peak.
Gold plummets
Gold extended its drop against the US dollar to reach its lowest level since June as the Fed lowered its expectations for both inflation and unemployment for the next few years. The metal was one of the hardest hit by the Fed’s announcement to taper its QE programme by $10bn to $75bn. Gold reached a low of $1,185.10 and closed the week at $1,203.92.
The Peninsula
