Euro hits highest trade-weighted level this year

 

After the Fed’s move, the ECB is under pressure to cut rates and adopt quantitative easing, the FT reports. The euro yesterday hit the highest trade weighted level this year, and the dollar fell to $1.37 against the euro. Last week’s Swiss franc devaluation also raised concerns about competitive devaluations. The ECB has so far resisted calls for quantitative easing, maintaining that it was more important to support banks directly through large liquidity injections, but the pressure to adopt QE may be rising.

As Ben Bernanke’s QE market rally faded, commodity markets rallied across the board as investors sought to protect themselves against inflation. A US commodities index was up by 6% yesterday, as investors bought oil and gold and other commodities. One analyst was quoted by the FT as saying that people were buying commodities as a hedge against both inflation and a falling dollar.

 

The Fed’s shock and awe strategy

Yves Smith in Naked Capitalism makes a number of interesting observations about the Fed’s shock and awe strategy. To us the most interesting assertion is that the large bond purchases will not offset the fall in global demand for US bonds, meaning that the supply of bonds will continue to rise faster than the demand, so that the Fed may after not be able to keep interest rates from rising.

 

Bini-Smaghi vs Paul Krugman

An interesting shoot out. After Paul Krugman’s assertion in the New New York Times that the euro area is hopelessly failing to react to this crisis, Lorenzo Bini-Smaghi published a letter in the Italian paper La Repubblica, which has been translated by the Wall Street Journal. Bini-Smaghi argues, among other things, that the fiscal response of the euro area member states was comparable to that of the US, and that European market interest rates, are in some instances even lower than US rates.

 

EU pitiful stimulus package finally agreed

One of the strangest proposals in crisis prevention was the European Commission’s “me too” €5bn stimulus package, which yesterday got agreed by the EU council. The problem with the original proposal was: it was not a stimulus at all, but a typical European pork barrel package of long-term spending commitments, on things like broadband infrastructure. The new package focuses on spending priorities which start in 2009 or 2010, FT Deutschand reports.

 

 

Is Germany about to send ground troops into Switzerland?

Of course not, but Germany’s finance minister and SPD chief said they might, and have triggered a major diplomatic incident. It seems that Germany is losing military-related inhibitions fairly quickly. Germany’s Social Democrats (of all parties) have resorted to military metaphors in their dispute with Switzerland over the issue of tax havens. Finance minister Peer Steinbruck compared dealing with the Swiss to sending “in the seventh cavalry to Yuma” – a reference to the American slaughtering of an indigenous tribe in Arizona. The Swiss were predictably enraged. SPD chief Franz Muntefering’s comment that one used to send soldiers, but that this was no longer the case, was also considered not helpful.

Steinbruck, who made similarly insensitive comments before, is now one of the most hated figures in Switzerland, and now received threats, and has to endure comparisons with Nazi figures. Switzerland’s leading news magazine picture him under the title “The Ugly German”. Jean-Claude Juncker, whose country has also come under criticism, said the German finance minister should be careful not to bully smaller countries where German is understood (meaning, Luxembourg, Switzerland, Austria and Liechtenstein). SPD politicians rose to the defence of their finance minister, as they all peddle the lie that tax havens are the main cause of the financial crisis. FT Deutschland reports that other SPD politicians are increasingly becoming concerned that this situation might get out of control. It already has. Merkel says she stands by her finance minister.

 

 

Jobs cuts are starting in Germany

This is the kind of news we will be hearing a lot more. FT Deutschland leads with the story that ThyssenKrupp, the industrial group, will cut 3000 permanent jobs in its steel, car component and shipbuilding divisions as a direct response to the crisis. So far, the crisis has not yet translated into significant increases in unemployment, as industrial companies have switched to subsidies short-time work, which allows companies to reduce working hours, and cutting costs, while the employment maintain a large percentage of their net earnings. But as the fall in German manufacturing output is increasingly perceived as being permanent, companies are expecting to reduce production and staffing as the crisis continues. The paper says in a separate front page article that the German government, privately, expects the economy to contract by 5% this year. This is not yet reflected in the official forecasts.

 

IMF criticises Geithner plan

The IMF made an unusally direct criticism of the Geithner plan, criticising that it lack essential details, according to the FT. The IMF recommended that toxic assets be removed from balance sheets, and transferred to a publically owned bad bank; viable banks should be recapitalised, and insolvent institutions should be closed down, or nationalised.

 

The rally is over, pessimism is back

A good blog entry by Dieter Wermuth, in Herdentrieb. He said the world had just experienced a strong, but short-lived bear rally, and that there is no reason to believe that much has changed. This still looks like an L-shaped recession for most of the industrialised world, and there is now the present danger of competitive exchange rate devaluations, and the trend towards a strong euro is exacerbated by the US switch towards net exports.

 

Good News from Ireland: You must be kidding

Old habits seem to die hard. Philip Lane, in the Irish economy blog, gets excited about a news report according to which Dublin managed to increased its relative ranking of world financial centres from 13 to 10^th place – while the absolute score has fallen for most). Congratulations! What interests us, however, is whether this is a good thing or a bad thing.

 

 

 

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