December 30, 2010

The Federal Want To Pressure Down U.S Dollar Worldwide

Filed under: Uncategorized — bigcapital @ 9:23 am
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The Federal Want To Pressure Down U.S Dollar Worldwide

There is a saying in the investment business, “don’t fight the Fed.”

Fed Swap Lines Purposely Keeping Dollar Weak

Central banks provided two pieces of market supportive news in the past 48 hours.

China announced its intent to buy Portuguese bonds, and the Federal Reserve extended its “swap lines” deep into 2011:

# China Ready to Buy Up to $6.6B in Portugal Debt (Reuters : )

# Fed Extends USD Swaps With Major Central Banks (Reuters : )

Via Reuters, the swap lines, at first set to expire next month, will now run til August 1st.

The lines were first opened to the ECB and SNB — the European and Swiss central banks respectively — and were later expanded to multiple additional central banks, including those of Sweden, Mexico and Brazil.

The August extension applies to the Fed’s counterparts in Europe, Japan, Canada, England and Switzerland.

So why is the Fed doing this? Straight from the horse’s mouth (official Fed statement):

“[The swap lines] are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets.”

That’s the official justification. A between the lines reading is slightly more self serving: The Fed wants to keep the dollar weak — or otherwise keep it from rising too much.

As you can see, from 2002 onward the $USD had been declining — a trend perceived as good for everyone. As Americans gorged on “stuff,” the vendor finance arrangements put in place by China and Middle East oil exporters allowed the party to continue unabated.

Long term interest rates were kept low via the recycling of $USD back into treasury bonds, in turn keeping mortgage rates low and perpetuating the housing bubble. Meanwhile many emerging markets enjoyed rapid growth — courtesy of a binging U.S. consumer — as the leverage and credit boom radiated outward.

But then, as things fell apart in 2008, the $USD saw a dramatic surge. A wave of panic swept the globe as the supernova debt boom collapsed. Trillions of dollars in credit flows evaporated, and American investors effectively “short” dollars (via overseas investments and ‘carry trade” type arrangements) had to cover with a vengeance.

As the chart shows, the $USD saw another upward surge in early 2010, first on China fears, and then eurozone sovereign debt fears as the Greek situation ignited. (This is when the Economist’s Acropolis Now cover was published — a keepsake to be sure.)

So, as you can guess, one of the many fears keeping Ben Bernanke awake at night is the possibility of a surging $USD.

Not only is the dollar a “risk-off” fulcrum, balanced against “risk on” for all other paper asset classes, a rising buck is also a political headache for the Obama White House and other American interests seeking a U.S. export revival.

So, back to those swap lines. Why and how would they be an attempt to keep the dollar down?

Well, first consider what a swap line actually is. From the Federal Reserve website:

In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.

In layman’s terms, we can think of a swap line as a standing guarantee of U.S. dollar liquidity. If you (as a central banker) ever need greenbacks in a pinch, you know you’ll be able to procure them instantly, no matter how “tight” the open market may be.

This standing guarantee reduces the odds of another violent $USD spike of the type we saw in late 2008. In a way, one can think of it as “short squeeze insurance.”

The many players around the world who are “short” U.S. dollars — by way of lending arrangements denominated in dollars and so on — have spiking dollar risk implicit in their positioning.

What the Fed has essentially said to these players is, “It’s okay for you to keep borrowing in dollars, because in the event of a new liquidity crisis we will create accessible dollars for you (via the channel of your local CB).”

Consider, too, the conditions under which all these central banks would be pushed to draw on their $USD swap lines at the same time.

By definition, these would be crisis conditions in which availability of $USD was scarce relative to near-term surging demand.

In such conditions, the Federal Reserve would have to create more dollars to meet existing outsized demand (as crisis-driven preferences for holding $USD, or covering short $USD obligations, would create a shortage).

So the liquidity promise is also a sort of printing-press promise: In the event of another crisis, the Fed will be on its toes and ready to “print” however much fresh $USD the world needs.

The really neat trick is, simply in making this promise, the Federal Reserve can achieve its aim of keeping the $USD down. This effect is produced even without the Fed doing anything.

How? Simple:

* The Fed has promised $USD liquidity will be there “if needed.”
* This promise can be “taken to the bank” — literally.
* Commercial institutions can thus rest easier with short-dollar liabilities.
* To wit, whether one is a bank, a commercial operator or a speculator, it’s very tempting to borrow in $USD these days — to leverage the greenback via some form of debt arrangement and participate in the “carry trade.”

But this move could also be considered risky due to the possibility of carry trade reversal and crisis-driven supply/demand crunch … and so, with the extension of the Fed swap lines, Uncle Ben has stepped up and said “Hey, no problem, carry trade away — we’ll be there in a tight spot (via printing press) to provide liquidity for you.”

And so the dollar stays suppressed, and everyone stays happy (apart from those pesky “non-core” inflation watchers, and anyone else feeling a cost of living crunch).


December 22, 2010

Moody’s Sees No Europe Defaults



LONDON –The euro zone “retains significant financial strength” and has the “resources, incentives, and political cohesion” needed to contain the sovereign debt crisis, Moody’s Investors Service Inc. said Tuesday.

“We believe that policymakers have sufficient resources and will use them as necessary to restore financial stability,” the ratings agency said in a report.

Moody’s said that all its euro-zone sovereign ratings with the exception of Greece are investment grade, reflecting its view that “the risk of a euro-zone sovereign default is very small.”

Beginning late October, euro zone sovereign bond markets have experienced a second wave of volatility this year, on worries about the health of sovereign borrowers and about proposals for a post-2013 crisis resolution mechanism that could penalize private lenders.

This prompted the European Central Bank to step up purchases of bonds issued by peripheral euro-zone members under its Securities Market Program.

Germany has resisted some ideas floated to deal with the crisis, such as increasing the size of European Financial Stability Facility, or issuing common euro-zone bonds.

Moody’s Investors Service said it doesn’t foresee defaults or maturity extensions on euro-area debt because the region will likely backstop weaker members, and reiterated that Portugal will likely stay investment-grade.

“Moody’s base-case scenario remains that over the medium term, no euro-zone country will suffer a payment default or otherwise impose losses on private-sector lenders through maturity extensions or other forms of distressed exchange,” the company said in a report today. “The collective willingness of the euro zone to support weaker members through the provision of liquidity will remain an important element of investor protection.”

 Its euro-zone sovereign ratings “reflect a range of factors including high intrinsic economic and financial strength and ready access to financial resources,” including those made available by other euro-zone members, Moody’s said.


WASHINGTON — The Federal Reserve on Tuesday extended a program set up during the European debt crisis to make it easier for foreign central banks to get access to U.S. currency to distribute to commercial lenders.

The Federal Open Market Committee said it’s extending, through Aug. 1, its U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan and the Swiss National Bank.

The swap arrangements, established in May, had been authorized through January.

Back in May, money markets were rattled by the strains in Greece, which subsequently received 110 billion euros of assistance through the International Monetary Fund and euro-zone nations. Since then, a similar package was arranged for Ireland, and there are worries that Spain and Portugal could need them as well.

The swap lines with the European Central Bank, the Bank of England, the Swiss National Bank and the the Bank of Japan will enable the central banks to conduct tenders of U.S. dollars in their local markets at fixed local rates for full allotment, similar to arrangements that had been in place previously, according to the Fed.

As the world’s reserve currency, the dollar is highly sought after outside the United States to settle trades — in commodity markets, for example.

 They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, the Fed said.

“It is a bond-bullish recognition that back-up liquidity facilities are still warranted in the current environment,” said analysts at CRT Capital.

November 30, 2010

Estonia On Final Countdown To Euro Adoption

Filed under: Uncategorized — bigcapital @ 8:37 pm
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Estonia on final countdown to euro adoption


With only one and a half month to go before the introduction of the euro in Estonia, the Commission today assessed the state of its practical preparations for the changeover. The Commission concluded that Estonia’s preparations are well advanced, while recommending further efforts in some areas during the final phase of the changeover. Estonia will be the 17th member of the euro area and will bring to 330 million the number of people in the European Union who share the single currency.


The Commission today adopted the eleventh regular ‘Report on the practical preparations for the enlargement of the euro area’. It focuses on Estonia, which will adopt the single currency on 1 January 2011.


“I am looking forward to welcoming Estonia in the euro area in January. The preparations in the financial sector are well advanced and the authorities are informing the public about the euro. I am confident everything will go well and I am convinced that Estonia will continue to pursue the stable and sound budgetary and macro-economic policies that will enable it to take full advantage of the euro”, said Olli Rehn, European Commissioner for Economic and Monetary Affairs.


Estonia has ordered around 45 million banknotes and 194 million coins to introduce the euro in cash. The banknotes will be borrowed from a National Central Bank in the euro area (Finland), in line with the practice in the recent changeovers. The euro coins are provided by the Mint of Finland following a public tender procedure.


The Central Bank of Estonia will start providing euro banknotes to commercial banks (so-called frontloading) in mid-November. The frontloading of euro coins started already in mid-September. As from 1 December 2010, all those retailers and businesses that have signed a specific contract with their bank will also be provided with euro cash. . All professional euro cash transports will be assured with the highest security.


As from 1 December 2010, 600,000 ‘euro coin mini-kits’ will be on sale at banks and post offices for people to by them in advance of the changeover. They will also be able to exchange their kroon cash holdings free of charge at the official conversion rate (1 EUR= 15.6466 EEK).


During the first two weeks of the changeover, Estonian kroons and euro will circulate in alongside each other. . Shops are however expected to give change in euro only whenever possible. This is important in order to speed up the changeover and reduce the cost of having to handle two currencies simultaneously.


In order to address consumers’ concerns about price increases and abusive practices in the changeover period, a Fair Pricing Agreement was launched at the end of August. The subscribers to the Agreement (e.g. retailers, financial institutions, local governments, internet shops etc) commit not to increase their prices without justification during the changeover to the euro and to respect the changeover rules. This is a very important initiative and special attention should be paid to improve its coverage, especially among small and medium-sized companies.


According to the latest Eurobarometer survey, carried out in September 2010, there has been an important income in the degree to which respondents in Estonia feel informed about the euro in comparison with May 2010, with 65% now feeling well informed (+15pp). This is encouraging, but efforts need to be pursued in order to reach all Estonian residents, in particular vulnerable groups, in time with the necessary information.


A staff working document attached to the report looks at the state of preparations in the other Member States that have not yet introduced the euro (except UK and Denmark that have a formal opt-out from the single currency)


=Estonia at a glance=


Estonia joined the European Union in 2004 and will adopt the euro on 1 January 2011

Surface area: 45 230 km2
Population: 1 340 341(Eurostat 2009)
Joined the European Union: 1 May 2004
Currency: kroon (EEK). Euro as of 1 January 2011


=Euro information=

Status: As of 1 January 2011, Estonia will be a member of the euro area. The kroon joined the Exchange Rate Mechanism (ERM II) on 28 June 2004 and observed a central rate of 15.6466 to the euro with standard fluctuation margins of ±15%. On 13 July 2010 the Council gave its green light to the adoption of the euro by Estonia on 1 January 2011.


Fixed conversion rate: €1 = 15.6466 Estonian kroonid


Adoption of the euro: Estonia will adopt the euo as of 1 January 2011




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November 14, 2010

Irish Banks’ ECB Borrowings Rise to 130 Billion Euros


Irish Banks’ ECB Borrowings Rise to 130 Billion Euros


Bank of Ireland rose 5 percent to 40 euro cents as of 12:25 p.m. in Dublin trading, reversing earlier declines, while Allied Irish Banks Plc soared 15 percent and Irish Life & Permanent Plc gained 4.7 percent on Friday.



Nov. 12 (Bloomberg) — Irish-based lenders’ borrowings from the European Central Bank rose 7.3 percent last month as the yield investors demanded to hold the state’s debt surged on concerns about its budget deficit and mounting bank losses.


ECB funds used by lenders including international and domestic companies climbed to 130 billion euros ($178 billion) as of Oct. 29, from 121.1 billion euros at the end of September, according to statistics published on the central bank’s website today.

Irish government bonds gained for the first day in almost three weeks today after European finance ministers said plans for a new system to handle euro-region debt crises won’t apply to outstanding debt.


Ireland’s banks are becoming more dependent on the ECB after the central bank said in September a bailout of lenders may cost as much as 50 billion euros as the state sinks more funds into nationalized Anglo Irish Bank Corp. and other lenders. Finance Minister Brian Lenihan said yesterday markets didn’t “fully” believe the banking bailout figure and investors are taking a “wait and see” approach on bank losses.


The nation’s 10-year bond yield pared a two-day surge of more than 1 percentage point, and the difference, or spread, over German debt of similar maturity fell to 582 basis points today from 646 basis points yesterday. A basis point is 0.01 percentage point.


“Any new mechanism would only come into effect after mid- 2013 with no impact whatsoever on the current arrangements,” the finance ministers of Germany, France, Italy, Spain and the U.K. said in a statement distributed to reporters in Seoul today during the Group of 20 summit.


Ireland’s gross funding need for 2011 will be 23.5 billion euros, falling to 18.6 billion euros in 2014, the nation’s debt agency said today. Moody’s Investors Service said last month Ireland’s Aa2 rating may be cut, while Standard & Poor’s and Fitch Ratings already have reduced their rating on the country on concern about the cost of bailing out banks.


Bank of Ireland Plc, Ireland’s largest bank, has 20 billion euros of net borrowings from “monetary authorities,” compared with 8 billion euros at the end of June, executives at the bank said on a call with analysts today. Chief Executive Officer Richie Boucher said that its deposit base has been “broadly stable since the end of September,” following outflows after Ireland’s sovereign rating was cut in August.


Bank of Ireland rose 5 percent to 40 euro cents as of 12:25 p.m. in Dublin trading, reversing earlier declines, while Allied Irish Banks Plc soared 15 percent and Irish Life & Permanent Plc gained 4.7 percent.

The country’s central bank provides an update on ECB funding reliance only for domestic institutions at the end of every month.

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