In US trade, the euro slumped to fresh two-year lows as concerns after the FOMC’s meeting minutes showed little sign that the Fed is moving towards another round of balance sheet expansion.
As it turned out, only a ’few members expressed the view that further policy stimulus would likely be necessary‘. The US Treasury market was largely indifferent to these revelations, but US stocks temporarily weakened before eventually recovering in full with the S&P500 closing flat and the Dow paring losses to finish down 0.4%. In the most euro-centric news of the day, Spanish Prime Minister Rajoy announced a fresh wave of austerity measures which, together with the existing consolidation programme, aims to reduce the public deficit by € 65 billion (6.3% of GDP) by end-2014. In particular, VAT rates are due to rise, while jobless benefits, public wages and even pensions are slated to be cut. These will certainly not be popular measures but are a necessary evil.
The moves were cheered by the markets with Spanish 10-year bond yields falling 24 basis points and the IBEX advancing 1.2%. Having ended yesterday’s Australian session around the 1.2270 level, the euro fell to a low two-year low of 1.2213 before recovering to close US trade at 1.2239. Upon resuming for Asian trade, the euro is essentially unchanged.