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Broadgate: Market News 1/2

1 February 2012

The dollar hovered at three-month lows against the yen on Wednesday and looked poised to lose ground for a fifth straight day, pressured by the Federal Reserve’s pledge last week that it would keep interest rates near zero at least until late 2014.

The U.S. Federal Reserve’s decision has triggered broad selling in the greenback and battered yields on U.S. Treasury notes, with the yield on the five-year note barely above levels not seen since at least the 1960s.

Financial markets have been riveted by the euro zone’s drive to restore fiscal discipline.

However, Gilles Moec, an economist at Deutsche Bank in London, said Italy’s problem was not its primary budget balance – before interest payments – but rather how to make its big public debt easier to carry by increasing potential gross domestic product growth. And that was exactly what Monti was doing.

“The problem is you don’t see ‘structural GDP’. It’s very hard to sift out the results of those policies in the short run, so the market will always have trouble pricing in these reforms even if they’re extremely important,” Moec said.

Take pensions. As a result of Monti’s reforms, Italy’s retirement age will rise to 67 before Germany’s does. And pensions will no longer be linked to a worker’s final salary.

Asian stock markets struggled on Wednesday as weaker U.S. data damped down recent optimism that the world’s largest economy may escape the gloom from the euro zone debt crisis, while Chinese manufacturing surveys failed to break the cautious mood.

Data from China failed to give markets a decisive lead.

Shares strengthened after the official Purchasing Managers’ Index showed the manufacturing sector expanded modestly in January, with the index reading inching up to 50.5 from 50.3 in December, above a 49.5 reading forecast.

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