The USD ended the trading week with sharp declines against nearly all the major currencies as soft consumer sentiment data reignited talk that the Federal Reserve will roll out credit easing measures that would weaken the dollar in exchange for stimulating and boosting the economy. On Friday, the Thomson Reuters/University of Michigan’s preliminary reading on the overall index on consumer sentiment dropped to 72.0 in July from 73.2 in June disappointing the markets which had expected a reading of 73.4. This reading is in line with the weakness of the labor market but most economists and investors agree that the U.S. economy needs more stimulus and according to the FOMC minutes, central bank officials are also exploring “new tools.”
Investors managed to ignore Moody’s decision to cut Italy’s credit rating, warning that Italy will more than likely see a noticeable increase in its borrowing costs. The rating was cut 2 notches from A3 to Baa2, just 2 levels above junk status and raising concerns of a contagion risk from Spain and Greece. This helped keep the Euro down to a near 2 year low against the greenback, finishing Friday up 0.38%, at 1.2249. The main cause for the unexpected boost for the Euro was after Moody’s downgrade, Italy raised 3.5 bn euros in an auction of medium term government bonds, with the rate falling to 4.65% from 5.3% last month.
Italy is the eurozone’s 3rd largest economy after Germany and France. Whilst its banks are less exposed to bad property loans as in Spain, the country has deep seated structural problems including low productivity, an inefficient public sector and a wide north/south divide. The economy has recorded lacklustre growth for years, despite having adopted the euro in 1999. In April, the government reduced its growth forecast for 2012, predicting now a 1.2% contraction in the economy compared with the previous forecast of a 0.4% contraction. The IMF expects worse and has predicted that the Italian economy to contract by 1.9% this year.
Talk also increased that the world’s second largest economy – China – will stimulate its economy via monetary loosening measures as Beijing reported that its economy has grown at the slowest pace in 3 years with Gross domestic product increased by 7.6% in the second quarter, compared with the same period a year ago. This is down from the 8.1% in the previous three months and as the world’s largest exporter, China is being hard hit by the slowdown in Europe and elsewhere. These are the country’s worst figures since the start of the global financial crisis after Beijing cut its growth target for the whole of 2012 to 7.5% back in March.