You can always hope.
As more details unfold about European austerity programmes, reports asked Charles Evans, Chicago Fed president, what the potential effects would be on the United States. According to Reuters, Mr Evans responded:
I’m hopeful that our exposure will be minimal to modest.
Being hopeful is one thing, expecting something to happen is another.
Of course, there are those that are far less hopeful (or is it expectant?) Read more
Two rumours — a French rating downgrade and President Sarkozy threatening to pull the country out of the euro — have helped weaken the currency to levels seen in October 2008. Deflation in Spain has added to the bears’ case, and better-than-expected industrial production in the US has also helped to strengthen the dollar. The euro has recovered against the dollar in a very volatile day, and is now trading at about 0.8048 euros per dollar.
The ECB paid euros to receive dollars from the Fed, promising to reverse those transactions in eight days’ time. It is the first usage of the revived, crisis-era, swap facility from the Fed. The idea is to help European banks to access dollar funding more easily through the ECB.
The Bank of England, Bank of Japan, Bank of Canada and Swiss National Bank did not use the facility this week. Read more
This week saw the biggest fall since August 2007 in central banks’ holdings of US marketable securities — the first fall for 13 weeks.
The $11bn fall is only 0.4 per cent of the $3,055bn holdings of Treasury and Federal agency securities, and holdings change with great volatility. But, as you can see from the chart, any large fall is rare. Read more
Investors say the ECB’s credibility has been put on the line in recent weeks as it has been forced to make two U-turns: relaxing eligibility rules for eurozone government debt as collateral, and reversing its opposition to buying the debt of peripheral eurozone countries. Some now fear it is only a matter of time before the central bank is forced to take one more crucial U-turn and succumb to full-blown quantitative easing to shore up the debt markets of the indebted nations in the eurozone.
In the eyes of some, this would be the final straw for its credibility in the marketplace. This is critical: if investors believe what a central bank says, it can influence markets without actually having to change policy. Before the euro was launched, Germany’s Bundesbank was so respected that a mere hint of a rise in rates would send bond yields higher. This meant markets in effect did the work for the central bank, tightening policy without it raising rates. Read more