Euro at One-Month High, China May Depreciate Currency

The euro hit a one month high during trading on Monday. Investors were encouraged by the higher-than-expected payroll report in the United States. Early in the morning, the euro reached a high of $1.2444. This is its highest level since July 5, 2012. After its initial rise, the euro dropped slightly to hang around $1.2402 versus the United States dollar.

On Friday, Europe’s currency had its largest one-day gain for a month at 1.7 percent. In the latest trade for today, the euro was up 0.1 percent.  Next month, the European Central Bank will meet to discuss new ways to decrease borrowing costs for Italy and Spain. The recent ECB meeting was met dismally by investors as the central bank chose to hold off on taking action.

Italian PM: ECB Standoff Makes Matters Worse

Italian Prime Minister Mario Monti urged the European Union to end the stand-off with the European Central Bank. Ongoing controversy and delayed monetary policies has caused the two nations’ bond rates to grow. In an interview today in the Spiegel Magazine, Monti advocated resolving the Eurozone crisis. He believes that the ongoing tension is causing Europe to begin dissolving psychologically.

Last week, the ECB initially decided not to take action. As a result, bond rates soared and the euro tumbled amid a decrease in investor sentiment. By Friday, the euro begin gaining again as investors concluded that the ECB would still take action at some point in the future. After the ECB meeting, Spanish 10-year bonds rose to a surprising high of 7.44 percent. By the end of the week, the bond rate dropped to 6.77 percent.

Similarly, Italian ten-year bonds jumped following the announcement to 6.28 percent. On Friday, Italian bonds simmered down to a more sustainable 6.01 percent. Prime Minister Mario Monti believes that the high rates paid by Spain and Italy help to subsidize German bond costs. Currently, Germany pays just 1.42 percent on their ten-year bonds.

On September 6, the European Central Bank is expected to meet again to resolve some of the conflict. In the interim, reactions by government officials may be few. The month of August is traditionally vacation time for employees. During this time, Spain’s Prime Minister Mariano Rajoy, French President Francois Hollande and German Chancellor Angela Merkel will all be taking some needed time off.

US Payrolls Improve Risk Sentiment

Last Friday, the United States government released a report showing a growth of 168,000 jobs during the month of July. This marks the greatest increase in hiring for more than five months. The growth in jobs encouraged investors to start looking for riskier currencies. In response, the greenback fell 0.2 percent versus the yen to 78.37. It is still higher than the two-month low of 77.90. The United States dollar index also dropped 1.2 percent.

During trading, the Australian dollar dropped 0.1 percent. Last week, it reached a five-month high of $1.0581. Today’s drop to $1.0561 shows that the Aussie may be in the process of stabilizing at more sustainable levels.

Asian Currencies Up

At 0135 GMT, the Korean won was up 0.77 percent versus the United States dollar to 1126.10. Many Asian currencies performed well due to the improvement in investor risk sentiment. The Philippine peso gained 0.22 percent to 41.76 peso per dollar.  In Thailand, the baht rose 0.22 percent against the greenback to 31.46 baht.  

China Wants to Depreciate Currency

The China Securities Journal, an official paper, had a commentary placed on the front page about the necessity of depreciating the yuan. The official paper believes that a depreciated yuan could bolster the Chinese economy. In the past, nations in Europe and the United States have charged that China was keeping their currency intentionally low. The report in the China Securities Journal came as a surprise considering China has denied unfair market practices in the past.

China has recently had to deal with a weaker than expected gross domestic product. The GDP for the nation grew at its slowest rate for three years during the second quarter of 2012. Ironically, the announcement that the yuan will be depreciated may form a kind of self-fulfilled prophesy. Investors who are wary about potential depreciation will place their money in other nations. As currency leaves the country, the yuan will be depreciated without market intervention and the export market will improve. Since the start of 2012, the Chinese yuan has fallen 1.23 percent versus the greenback.