A resurgence of concerns over the situation in Ukraine has promoted demand for currencies that are considered safe havens, including the Japanese yen and the Swiss franc.
By Peter Martin
Friday, April 25, 2014
The reaction of the financial markets to developments in Ukraine has been fairly orderly and moderate so far, but with tens of thousands of Russian soldiers still posted close to the border, more severe sanctions against Russia on the horizon and rhetoric between Russia and the West hotting up, the chances of a military conflict seem very real.
US Secretary of State John Kerry said yesterday that Russia was using ‘distraction, deception and destabilisation’ to achieve its goals, while Ukrainian Prime Minister Arseniy Yatsenyuk warned that military conflict in Ukraine would lead to military conflict in Europe and said that ‘the world has not yet forgotten World War II, but Russia already wants to start World War III.’ By late morning in New York on Friday, USD/JPY had slid 0.27% to 102.04, leaving the yen on track for a weekly gain against the dollar, while USD/CHF dropped 0.1%.
The dollar’s decline against these safe havens comes despite signs of improvement in the outlook of US consumers. The widely-followed index of consumer sentiment from the University of Michigan rose to a final reading of 84.1 for April, up substantially from its mid-month level of 82.6 and March’s final reading of 80.0 and is just a single index point away from the recovery high set last summer of 85.1. The current conditions component of the survey showed particular strength, jumping 3.0 points from last month to set a post-recession high of 98.7. This is perhaps the strongest sign yet that the US economy is lurching back into life with the spring weather after the restraining influence of this winter’s unusually harsh conditions. Consumers that are more confident about their job and income prospects are more likely to spend, and consumer spending is a key driver of US GDP.
The picture of a spring recovery is somewhat clouded though by surprising weakness in the flash reading of the services Purchasing Managers’ Index (PMI) for April, also released on Friday morning, which slipped to 54.2 from the 55.3 seen in mid-March. This is still well into growth territory, with any reading above 50 indicating expansion, but a slowing rate of expansion was not expected after the end of the winter. The strength shown by the consumer sentiment index has helped the dollar to pare its losses against the British pound today. A report earlier in the day had shown that UK retail sales increased 0.1% in March, beating expectations that had called for a monthly decline of 0.4%. Such a result will bolster hopes for how UK first-quarter GDP will turn out, but the report also suggested inflationary pressures are soft, meaning the Bank of England is unlikely to shorten the timetable for tightening UK monetary policy. GBP/USD had risen as high as 1.6833 earlier in the trading session, but by late morning in New York was little-changed on the day at 1.6810.
In a speech yesterday, ECB President Mario Draghi re-iterated his pledge to introduce further stimulus measures if needs be to combat low inflation, saying that the ECB was ready to use ‘both unconventional and conventional instruments to deal effectively with the risks of a too-prolonged period of low inflation’ and once again warning that the strength of the euro was ‘potentially a threat to the ongoing recovery.’ Despite these comments, the euro has gained modestly against the dollar today, boosted by positive assessments of the eurozone’s creditworthiness from leading agencies. Fitch raised its outlook for Italy’s rating, while Standard & Poors raised its rating for Cyprus and confirmed France’s outlook as being stable. EUR/USD rose 0.04% to 1.3837.
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