Weekly Currency Brief – 13th Dec – 20th Dec 2016

All change
A reversal of the previous week’s trends saw the “risky” emerging market and commodity-related currencies under pressure while the safe-haven yen put in the second-strongest performance. The exceptions to this pattern were the euro, which was unchanged against the pound, and the US dollar, which strengthened by 2.2%. On average the British pound was up by 0.2%, a quarter of a yen, against the other dozen most actively-traded currencies.

Greenback prevails
The US dollar’s big break came on Wednesday when the Federal Reserve announced it was raising its target range for the Federal Funds rate from 0.25-0.5% to 0.5-0.75%. The news surprised no one because that was exactly what the world was expecting. What did take investors by surprise, however, was the accompanying Economic Projections. They indicated that members of the policy-making committee were now looking at three further rate increases in 2017 rather than the two that had previously been reckoned on.

It was not an entirely trouble-free week for the dollar though. After the Chinese navy stole an underwater drone from the US navy investors worried that the reaction of the White House was irresolute (“oh well…) and that of the White-House-Elect was childish (“alright, keep it then”). The dollar had a difficult day but not one that was bad enough to spoil its excellent week.

Euro wallows
Domestic financial disturbances in Italy and Greece did not improve investors’ attitudes towards the euro. In Italy the government is trying to drum up between €15bn and €20bn to reinforce the balance sheets of the country’s banks, some of which are sitting on uncomfortably high levels of bad loans. If investors cannot be persuaded to stump up the money the government has said it will provide it itself even though to do so would be to break EU rules.

In Athens the government has said it will spend some of its budget surplus on pensions, school means and localised tax breaks. The country’s creditors say the move contravenes the terms of Greece’s bailout and they have suspended debt relief measures that had been agreed only a couple of weeks back.

Sterling seesaws
It was a game of at least six halves for the pound, which changed direction almost on a daily basis. On most occasions the reversal had at least something to do with Brexit although strongish data for UK employment and retail sales contributed to some of the pound’s gains.

The most recent development on the Brexit front came when the prime minister refused to rule out the idea of Britain paying money to the EU in return for access to the single market. She didn’t exactly rule it in, but her comments echoed those made previously by the Brexit secretary. Investors liked the idea and the pound jumped half a cent.