Dollar Holds Gains

The greenback held recent gains and rose to a two month high against the Japanese yen. The yen was widely pressured by Japanese fiscal concerns after Standard and Poor’s said Japan’s rating was at risk if the government does not take measures to stabilize and reduce Japan’s debt. Trading has been thin in advance of years end holidays in Asia, Europe and the United States. Neil Mellor of Bank of New York Mellon stated, “People are starting to get increasingly worried about Japan’s fiscal situation. Fiscal issues will be the big story at the start of 2010, especially in Japan and the UK.” Investor concerns about how the UK will finance massive deficits have weighed heavily on the pound in currency markets.

Fed Rate Speculation

Greatly improved US economic data has led many traders and investors to speculate that the Fed may raise rates sooner than expected and will also withdraw emergency measures taken at the beginning of the global financial meltdown. When the Fed will raise rates is expected to be a key question and investors are closely watching comments by Fed policymakers for any signs of rate hikes. Traders and investors say that once markets get a sense of timing for Fed exit strategies the yen could become the currency of choice for carry trades. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company stated, “Yield differentials between the U.S. and Japan have started to widen slightly, showing evidence the market is conscious of the prospect of the U.S. exiting its easy policy. With that perception behind the dollar, if the U.S. heads towards the exit, the dollar-funded carry trade is expected to wane as Japan is seen as more likely to ease further.”

Wednesday (Dec. 30th) offered little in the way of economic data as Asian, European and US markets prepare to close for year end holidays.