The euro rose to a five-week high against the dollar as European Central Bank President Mario Draghi refrained from introducing further monetary stimulus.
The 17-nation currency appreciated against all of its 16 major counterparts as the ECB kept its interest-rate targets unchanged and gave no indication that policy makers will introduce a negative deposit rate that would drive investors into riskier assets. The pound weakened for a third day versus the euro as the Bank of England kept interest rates at a record low. The U.S. economy added 185,000 jobs last month, a Bloomberg survey shows before the Labor Department report tomorrow.
“There’s nothing that’s happened today to give the impression euro-dollar is going to go down,” Kit Juckes, global strategist at Societe Generale SA, said in an interview on Bloomberg Television with Guy Johnson. “All that can happen is a really big payroll number tomorrow or something like that from the states. That’s all that could change it at all.”
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The European Central Bank (ECB) has kept its benchmark interest rate at a record low of 0.25%.
The decision follows its surprise cut from 0.5% in November.
ECB president Mario Draghi said the decision to keep the rate at its current level reflected the fact that the eurozone’s economy remained “subdued”.
The eurozone – the 17 countries that use the euro currency – grew by 0.1% in the July-to-September period.
This compares with 0.3% growth in the previous quarter.
In a news conference following the announcement, Mr Draghi confirmed the ECB’s forward guidance that the interest rate would remain at the same level or lower for the foreseeable future.
Prices remained “subdued”, he said, despite the recent increase in the eurozone inflation rate from 0.7% to 0.9%.
The ECB has reduced its benchmark interest rate consistently since 2008, when it stood at 3.75%, in response to the region’s sustained debt crisis and contracting economy.
This refinancing rate determines what banks pay to borrow from the ECB and influences borrowing costs for businesses and consumers.
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Australia and South Korea have agreed on a free trade deal in an attempt to boost trade between the two countries.
As part of the deal, tariffs on key Australian exports to South Korea such as agricultural products, energy and resources will be eliminated.
It is also likely to help South Korean firms in sectors such as steel, textile and car manufacturing to boost their presence in Australia.
Trade between the two nations was worth A$32bn ($29bn; £18bn) in 2012.
Australian Prime Minister Tony Abbott said the benefits of the free trade agreement would “start flowing immediately and will be long-lasting”.
“Independent modelling shows the agreement would be worth A$5bn between 2015 and 2030 and boost the economy by around A$650m annually after 15 years,” Mr Abbott was quoted as saying by the Australian Broadcast Corporation.
The deal still needs cabinet approval in Australia and South Korea.
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Warnings by economists that the U.K. recovery is too fragile for the Bank of England to curb monetary stimulus are going unheeded in the foreign-exchange market, where no currency can match the pound’s gains since March.
Sterling is at its strongest since 2010 against a basket of the dollar, euro, yen and six other top currencies based on Bloomberg Correlation-Weighted Indexes. The pound is up 8.8 percent versus the dollar since March 12, the most of 31 major developed- and emerging-market currencies tracked by Bloomberg.
While traders are betting on the BOE being the first major central bank to tighten policy as unemployment falls and inflation holds above targeted levels, 71 percent of economists in a Bloomberg survey published Nov. 20 said the recovery has yet to achieve “escape velocity.” That’s a term BOE Governor Mark Carney has used to describe conditions that will allow him to raise interest rates from a record low.
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The biggest problem facing the euro zone is a long period of stagnation, a member of the European Central Bank’s governing council said Tuesday.
“If you fear something you should fear the right thing. It’s not inflation, it is stagnation that is the real danger,” said Ewald Nowotny, who is also the governor of Austria’s central bank.
Mr. Nowotny’s comments come after the ECB last week cut its benchmark interest rate to a record low, a move that was criticized by some countries, such as Germany.
The rate cut needs to be seen in the larger economic context, Mr. Nowotny said, as it will help to increase real incomes especially for low-income earners.
Central banks have been “pushing conventional instruments up to the limit” in fighting the debt and financial crisis, Mr. Nowotny said at a conference in Vienna.
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Gold prices are slightly higher in early action Tuesday, after scoring another three-week low in overnight dealings. Bullish fundamental news in the gold market has been scarce recently, while the overall technical posture in gold favors the bearish camp. December Comex gold was last up $2.80 at $1,283.90 an ounce. Spot gold was last quoted up $2.90 at $1286.25. December Comex silver last traded down $0.027 at $21.26 an ounce.
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India’s biggest jump in foreign-exchange reserves in two years offers the nation greater ammunition to support the rupee as U.S. policy makers debate when to pare back monetary stimulus.
The reserves rose $6.7 billion in October to $283 billion, the steepest monthly increase since 2011, after central bank Governor Raghuram Rajan offered concessional dollar-swaps for lenders to spur inflows. Bank of America Merrill Lynch estimates they will reach $305 billion by the end of March, the month the U.S. Federal Reserve is forecast to pare bond purchases.
“Building reserves strengthens India’s balance sheet,” said Vivek Rajpal, a strategist at Nomura Holdings Inc. in Singapore. “That should help prevent excessive volatility in the rupee when the U.S. tapers, even as India still needs to curb risks from budget and trade deficits.”
A stable exchange rate would help contain the cost of imports as Rajan fights Asia’s fastest consumer-price inflation to protect the more than 800 million Indians living on less than $2 per day. The rupee has climbed about 8.5 percent since slumping to a record low in August, when speculation of Fed tapering as early as the following month led investors to pull billions of dollars from emerging markets.
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After slashing interest rates to almost nothing and printing trillions of dollars, central banks are becoming increasingly reliant on another policy weapon: sucker punching markets.
The European Central Bank shocked investors and forecasters last Thursday by cutting its main refinancing rate to a record low, reacting to a shock decline in inflation.
It was the second big central bank surprise in less than two months, after the U.S. Federal Reserve decided in September not to trim its monthly bond purchase stimulus.
And beyond the immediate impact on financial markets, central banks’ shock therapy tactics have also had a lasting effect.
The yield on the U.S. 10-year Treasury bond — one measure of government borrowing costs — fell sharply in the aftermath of the Fed’s decision, and it shows no signs of revisiting September’s peaks for the year any time soon.
The ECB’s rate cut helped weaken the euro more than 1 percent against the dollar, and most economists polled by Reuters reckon it will put the currency on a firmly lower path from here — huge help for the fragile euro zone recovery.
With scant room left to cut interest rates again and appetite for more rounds of money printing waning, economists say surprising markets will increasingly feature in policymaking.
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New Zealand central bank Governor Graeme Wheeler said he sees no opportunity at the moment to intervene in the currency market to counter a “very strong” exchange rate.
“If we see opportunities to make a difference and create uncertainty about the future direction of the exchange rate in traders’ minds, then we would be prepared to intervene,” he said in an interview with Radio New Zealand. Asked if he sees that at the moment, he said: “not at the moment.”
Wheeler is concerned that the New Zealand dollar, which rose to a five-month high this week, will hurt exports and slow the economic recovery. Last month he said interest rates would stay at a record low for the rest of 2013 and he introduced limits on low-deposit home loans to curb property inflation rather than raising borrowing costs.
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