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ECB Disappoints

Announcements by the European Central Bank yesterday indicated that there will be no major solutions to the debt crisis. Like last week, European Central Bank President Mario Draghi promised to do anything it takes to prop up the Eurozone. In yesterday’s announcement, the ECB kept interest rates at 0.75 percent. The ECB plans on finding a way to help debt-stricken nations in the coming weeks.

Euro Drops

After the statement by the ECB, the euro dropped more than three cents. On Friday, the European Union’s currency was trading at a one-week low of $1.2134 against the United States dollar. Support for the euro is at $1.2042. This rate would mark a 25-month low for the currency although a further drop to the 2010 low of $1.1876 is still possible. Most recently, the currency rose to a weak level of $1.2179. The euro also dropped against the yen, Australian and New Zealand dollars.

Waiting for US Jobs Data

The markets are now waiting for the jobs report to come out of the United States. Most market analysts believe that the economy will have added 100,000 jobs for the month of July. Forecasts show the unemployment should still hover around 8.2 percent. If the jobs report shows higher gains, it could put a damper on hopes that the Federal Reserve will perform more stimulus actions. Lower employment numbers could place the United States dollar under more pressure.

With a weak euro, the dollar index shot up to 83.332 from its former one-month low of 82.198. The Australian dollar dropped to $1.0458 versus the greenback. On Thursday, the Aussie managed to reach a high of $1.0577. Versus the yen, the greenback dropped to 78.24 from the previous day’s high of 78.54.

Spanish Bonds on the Rise

After dropping to sustainable levels this last week, Spanish ten-year bonds rose to 7.4 percent. Italian borrowing costs also increased to 6.3 percent. With the recent statement by Draghi, the Italian and Spanish bond markets are suffering. Any level above 7 percent is considered unsustainable and can result in a full-scale bailout. Greece, Portugal and Ireland were all forced to accept European Union bailouts after their ten-year bonds breached the 7 percent barrier. Hindered by Draghi’s statement, the bond markets will stay uncomfortably high until the European debt crisis is resolved. 

Federal Reserve Not Taking Any New Steps

On Wednesday, the United States Federal Reserve Bank chose to take no additional steps to prop up the United States economy. The Fed believes that economic growth would remain moderate and the unemployment rate would drop very slowly over the next few quarters.

The United States Federal Reserve Bank plans on closely monitoring the situation and will provide aid if needed. They will not be taking action until their next meeting in September.

Forward Guidance

Currently, the Federal Reserve Bank has chosen to uphold a zero percent interest rate until late 2014. It adopted this approach in 2008 and has chosen to continue it amid a sluggish economy and high unemployment rates. Technically, the Fed has only predicted that they wouldkeep interest rates at zero. As a prediction, the Fed is not fully committed to this decision. Some analysts are also doubtful about the ability of the Fed to keep interest rates at zero until late 2014. With Federal Reserve Chairman Ben Bernanke finishing his term in January of 2014, a consistent policy may be difficult. This policy prediction is known among financial analysts as “forward guidance”. The Fed uses forward guidance to allay investor concern about the future.

The recent drop in the euro has contributed to the greenbacks temporary rise. To sustain the currently high levels, the United States will have to address the unemployment rate, high household debt and low access to credit. At the moment, more than 23 million workers in the United States are unable to find full-time positions.

Rupee at 56-mark

During trading today, the Indian rupee hit 56.15 versus the United States dollar. This marks a 31paise drop and a new one-week low. The sudden fall of the rupee can be attributed to increased demand for the greenback by importers. At the same time, the Sensex dropped 115.95 points. It is currently at 17,108.41.

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