Euro, stocks steady after Japan downgrade, Fed pledge

The euro slipped off two-month highs against the dollar yesterday as markets reacted to a ratings downgrade for Japan and a pledge by the US Federal Reserve to keep its stimulus measures in place.

The euro got a boost earlier when French President Nicolas Sarkozy declared that he and Germany’s Chancellor Angela Merkel would never allow the single currency to fail while top officials at the European Central Bank cautioned again on the dangers of inflation.

European stock markets meanwhile were mostly firmer, content to digest the Fed’s commitment on Wednesday to keep its current stimulus programme in place as it seeks to bolster the US economic recovery.

London’s FTSE 100 index of leading shares was little changed at 5,965.08 points. In Paris, the CAC 40 was up 0.26 per cent at 4,059.57 points while in Frankfurt the DAX gained 0.40 per cent at 7,155.58 points.

In New York, the blue-chip Dow Jones Industrial Average continued to hold above the psychologically important 12,000 points level, showing a gain of 0.26 percent to 12,016.02 points around 1545 GMT.

Elsewhere in Europe, Madrid gained 1.48 per cent and Milan put on 1.38 per cent but Swiss stocks were down 0.46 per cent.

In late London trade, the euro was at 113.66 yen, up sharply from 112.62 yen in New York late on Wednesday after Standard & Poor’s cut Japan’s credit rating for the first time since 2002, accusing the government of lacking a “coherent strategy” in efforts to ease the highest debt of any industrialised nation.

“The downgrade reflects our appraisal that Japan’s government debt ratios – already among the highest for rated sovereigns – will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s,” S&P said.

“In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country’s debt dynamics,” it said.

Japanese Finance Minister Yoshihiko Noda insisted his government would strive for fiscal discipline to win the confidence of markets.

Meanwhile, the dollar rose to 83.01 yen from 82.16 yen and the euro eased to $1.3691 from $1.3707 late on Wednesday.

Analysts suggested the SP downgrade was unlikely to have much further impact given that Japan’s massive debt burden is mostly owed to its own citizens.

“Although (the) move is a warning signal that debts of Western nations remain a bigger issue than just peripheral Europe, Japan’s debt is held mostly by domestic investors,” said Kathleen Brooks at trading group Forex.com.

“Thus, the yen sell-off may also prove to be short-lived.”

Mr Sarkozy told the World Economic Forum in Davos that “whether it be Chancellor Merkel or myself, never, never will we turn our backs on the euro. We will never abandon the euro; we will never drop the euro.”

Several eurozone countries are mired in massive public debt, leading some observers to question whether the single currency bloc can hold together, but the French leader has made it clear that this is a political priority.

Dealers said the stock market reaction to the Fed’s statement overnight was positive overall.

“Investors shrugged off any negative sentiment created by Standard & Poor’s decision to cut their credit rating on Japan,” said Joshua Raymond, an analyst at City Index traders.

“We have seen a mildly positive real reaction from equity traders to (the Fed’s) ... decision, despite the cautious stance on the US economic recovery.”