Gangnam-Gu, Seoul -- (SBWIRE) -- 12/02/2010 -- Strathclyde Associates Foreign Exchange Markets October 2010 Part 1: Uncertainty has remained the predominant feature of the foreign exchange markets over the past month. The sovereign debt crisis in Europe has clearly not been resolved; and there has been further evidence of the conflicting views of the central bankers about the most appropriate measures to correct the current problems, with the Fed primarily interested in maintaining the momentum in the US economy, and the European Central Bank and the Bank of England more anxious to tighten fiscal policy to reduce the size of outstanding fiscal deficits. This general uncertainty produced a further fall in the dollar in the early part of the month, and ahead of the recent meeting of the Fed’s Open Market Committee, in the expectation that there would a further easing of monetary policy; and then a subsequent recovery after policy was left basically unchanged, to leave the dollar slightly higher over the month.

The euro has weakened because of renewed fears about debt defaults; sterling has moved slightly higher as the markets have continued to react favourably to the proposed measures to reduce the UK huge fiscal deficit; and there has been a continuing rally in the yen because of its enhanced “safe haven” status. But the movements in the markets have been relatively small, as both traders and investors have awaited guidance about future prospects.

Strathclyde Associates Foreign Exchange Markets October 2010 Part 1: The euro remains under pressures because of the threat of debt defaults, and a possible break-up of the single currency system; sterling has been helped by the early actions of the new coalition government, but there are doubts about whether it will survive, and whether it can implement the proposed austerity measures even if it does survive; the strength of the yen is clearly unwelcome to the Japanese authorities, and has increased the risk that the Bank of Japan will intervene in the markets to try to reverse the trend; and China has provoked considerable criticism, especially in the US, by its latest actions to depress the value of the renmimbi. In this situation, although forecasts are extremely difficult, we still believe that the dollar will “muddle through”, and that this will hold the currency system together. In the statement; after the latest meeting of the Fed’s Open Market Committee. The bank downgraded its view of economic prospects, indicating that “the pace of recovery in output and employment has slowed in recent months”, and was likely to be “more modest” than anticipated in the near-term.

It would therefore “continue to monitor the economic outlook and financial developments, and will employ its policy tools as necessary to promote economic recovery with price stability”.

But at the meeting it made no major policy changes, and only agreed to begin reinvesting the proceeds from maturing mortgage-backed and agency securities that it had previously acquired into Treasury securities to ensure that there was no tightening of monetary policy. But it is clear that its main priority in maintaining the momentum in the economy, and therefore further stimulatory measures are likely if the economic situation continues to deteriorate.

And the same priority exists in the conduct of fiscal policy Congress has shown some reluctance to sanction new spending programmes requested by President Obama; but it has recently voted to inject an additional $26 billion into the economy, transferring funds to cash-strapped states to avoid further jobs cuts in the public sector, and despite the massive size of the existing fiscal deficit. Its priorities are therefore also clear.

After rallying fairly strongly recently, the euro has fallen back over the past month. The improvement in the dollar after the Fed’s Open Market Committee meeting has been an important factor; But there have also been renewed concerns about sovereign debt defaults in Europe, and the viability of the single currency system, and this appears to have led to some withdrawal of capital funds from the European markets. The latest available evidence on the performance of the euro-zone economy has been encouraging.