Saturday, January 28, 2012

More Greek Drama

It’s choppy seas for the dollar this week as foreign-exchange markets focus on U.S. employment data, a European Union meeting and details of a Greek bond restructuring. Likely to rock the boat is January U.S. non-farm payrolls out Feb. 3, especially since it comes in the wake of the flaccid GDP numbers on Friday.

Expect to see a weak jobs number that could send the dollar lower as it increases the likelihood of a new round of bond buying by the Federal Reserve. That, in effect, pumps more dollars into the market, sending it lower against the other currencies. A strong payroll figure should hold the Fed from any such move firming the dollar.

But, the dollar is headed lower nevertheless… Last week the Federal Open Markets Committee reiterated its intention to continue boosting the economy with low interest rates for the next few years. Now, that should money scurrying out to places like India, China and even Europe where they are offering a better rate of return. The FOMC announced that it anticipates economic conditions are likely to warrant exceptionally low levels for the federal funds target rate at least through late 2014. The Fed had earlier suggested that it would keep rates low until mid-2013.

Long-term Europe does not look so hot. The market is still waiting to find some resolution to the continent’s sovereign debt crisis. European Union leaders meet in Brussels on Monday to take the next steps towards creating a permanent bailout mechanism and enforcing greater fiscal discipline among members. The party pooper might as yet be Greece, which is in negotiations with its creditors reach a deal to reduce its privately held debt. How the Greeks restructure their debt could signal how the other southern European move to resolve their liquidity problems. Clearly, I am not seeing an early resolution to that problem; at least not this week.