Financial Markets
The US dollar weakened against the euro, pound sterling and yen in the 2nd half of 2004 and reached the lowest level vis-à-vis the euro since 1999, when the euro was introduced. The background to the weakening included the increasing US balance-of-payments deficit.
In the USA the 10-year yield was virtually unchanged for the year overall, while the corresponding yield in the euro area fell. The divergence was attributable among other factors to better growth prospects for the USA than for the euro area, as well as the prospect of further monetary-policy tightening in the USA.
The global stock markets rose moderately in 2004. The price increases were at the same level in the USA, Europe and Japan, while the Scandinavian stock markets fared better than Europe in general.
After a general strengthening of the US dollar in the first months of 2004, the dollar weakened vis-à-vis particularly the euro and the pound sterling in the 2nd half-year, cf. Chart 14. In December the dollar fell to 1.36 dollars per euro, which is the lowest level against the euro since 1999, when the euro was introduced. In total, the dollar fell by approximately 8 per cent against the euro and the pound sterling in 2004. The dollar also weakened against the yen in 2004, but to a lesser extent.
| DOLLAR VIS-À-VIS EURO, YEN AND POUND STERLING |
Chart 14
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| Note: Weekly observations. | |
| Source: EcoWin. | |
The weakening of the dollar should be seen in the light of the imbalances in the USA with large deficits on the balance of payments and the government budget. However, this is not the only explanation since the dollar's course is characterised by large, prolonged fluctuations that do not always reflect real economic development. Some Asian central banks increasingly place their reserves in euro, which may also have contributed to the dollar's weakening vis-à-vis the euro and the pound sterling.
The Bank of Japan intervened for large amounts in the foreign-exchange market in early 2004, by buying dollars for yen to counter a strengthening of the yen. Other Asian countries, including China, and Russia also intervened in the foreign-exchange market by buying dollars and euro. The growing stocks of dollars in the foreign-exchange reserves of these countries were to a large extent invested in US government bonds. This contributed to keeping US interest rates at a low level.
Overall, the rate of the Japanese yen vis-à-vis the euro was constant during 2004, but with some volatility at the beginning of the year. At end-2004 the exchange rate was 141 yen per euro and 103 yen per dollar.
The pound sterling strengthened by approximately 6 per cent against the euro in the 1st half of 2004, cf. Chart 15, but weakened equivalently in the 2nd half-year so that the exchange rate at end-2004 was almost unchanged at 0.71 pounds per euro.
| POUND STERLING, NORWEGIAN KRONE AND SWEDISH KRONA VIS-À-VIS EURO |
Chart 15
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| Note: Weekly observations. | |
| Source: EcoWin. | |
The rate of the Swedish krona vis-à-vis the euro has fluctuated between almost 9 and 9.5 kronor per euro in recent years. This was also the case in 2004. In the 2nd half-year the krona tended to strengthen against the euro, and at end-2004 the exchange rate was 9.0 kronor per euro.
The Norwegian krone has in the last few years fluctuated more against the euro than the Swedish krona. The tendency for the Norwegian krone to weaken against the euro since the beginning of 2003 was interrupted in mid-February 2004, and up to the end of 2004 the Norwegian krone strengthened by more than 6 per cent. The strengthening came at the same time as major oil-price increases that affect demand for Norwegian kroner since revenue from Norwegian oil exports is in dollars. The Norwegian Petroleum Fund primarily places its funds abroad in order to limit the impact on the Norwegian economy.
The Bank for International Settlements, BIS, conducts a triennial global survey of foreign exchange and derivatives market activity. Some of the results of the survey from April 2004 are presented in Box 3. Among other things, the survey shows that day-to-day turnover in the global foreign-exchange market has increased considerably since 2001 and that the dollar is still the most frequently traded currency. The euro's share of turnover has remained unchanged since 2001.
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Box 3
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The Bank for International Settlements, BIS, conducts a triennial global survey of foreign exchange and derivatives market activity. The survey from April 2004 shows that since the previous survey in 2001 turnover in dollars in the traditional foreign-exchange market, comprising spot and forward transactions and currency swaps, had grown by 57 per cent measured at current exchange rates and by 36 per cent measured at constant exchange rates. The value of the day-to-day turnover was approximately 1,900 billion dollars. Among the reasons for the rising foreign-exchange turnover BIS states increased investor interest in foreign exchange as an alternative to bonds and stocks, as well as the growing importance of hedge funds. According to the survey there were no major changes in the composition of the transactions broken down by currencies. In April 2004, 89 per cent of the global turnover was transactions with one leg in dollars, while the corresponding figures for the euro, yen and pound sterling were 37, 20 and 17 per cent, respectively. Dollar/euro was the most frequently traded currency pair, accounting for 28 per cent of total turnover, while dollar/yen and dollar/pound accounted for 17 and 14 per cent, respectively. Geographically, the UK remained the largest foreign-exchange market with 31 per cent of global turnover, while the USA and Japan accounted for respectively 19 and 8 per cent of global turnover. The survey can be found at www.bis.org under "Publications and Statistics". |
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INTEREST RATES
Based on increasing optimism about the US economy, the yield on the benchmark 10-year US government bond increased by just over one per cent in the 2nd quarter, to 4.8 per cent in mid-May, following a slightly falling trend since mid-2003, cf. Chart 16. Over the summer the economic indicators became less clear-cut and together with soaring oil prices this led to uncertainty concerning the strength of the upswing in the USA. Against this background the US long-term yield fell to approximately 4 per cent in September, and then rose slightly again. At the end of February 2005 the yield was 4.3 per cent, which is low in view of the growth in the US economy.
| 10-YEAR YIELDS IN THE USA, THE EURO AREA, THE UK AND JAPAN |
Chart 16
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| Note: Weekly observations. For the euro area, the yield on a 10-year German government bond has been applied | |
| Source: EcoWin. | |
The Federal Reserve raised the federal funds target rate on six occasions during 2004 and the beginning of 2005, by a total of 1.5 per cent to 2.5 per cent at the end of February 2005. Together with falling yields on long-term bonds in the same period this resulted in a flatter yield curve in the USA during 2004. The reduced slope of the yield curve and the falling long-term yields are both unusual compared to previous periods in which the Federal Reserve has raised interest rates, cf. Box 4.
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Box 4
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The fall in the benchmark 10-year US government bond yield in the 2nd half of 2004 coincided with the latest series of increases in interest rates by the Federal Reserve. This pattern is unusual. In the last 20 years, the 10-year government bond yield has typically risen in periods when the Federal Reserve tightened monetary policy, cf. the Chart below. In 2004 the yield curve also flattened considerably, while the typical pattern has been a steeper or unchanged slope of the yield curve in connection with monetary-policy tightening by the Federal Reserve. Part of the explanation may be that in 2004 the fed funds target rate was raised from a historically low level for the official interest rate. Consequently, the increases are perceived more as normalisation of the level of interest rates at the short end, rather than as monetary-policy tightening to address immediate concerns about economic activity and inflation development. Purchases of US government bonds by Asian central banks also contributed to keeping the yield down.
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In the euro area the yield on the benchmark 10-year German government bond broadly matched the development in the USA in 2004, although the fluctuations were less pronounced, which is the normal pattern. The relatively close correlation between long-term yields in the USA and Europe was, however, broken at the end of 2004 when European yields continued to fall despite the increase in the USA. Among other factors, this was attributable to diverging growth prospects for the USA and the euro area, as well as the fact that the official interest rate is not expected to rise as much in the euro area as in the USA. At end-2004 the 10-year yield in the euro area was 3.7 per cent. The European Central Bank, ECB, has not adjusted its official interest rates since June 2003. The ECB's minimum bid rate for the main refinancing operations thus remained unchanged at 2 per cent in 2004.
In Denmark the yield on the benchmark 10-year government bond matched the development in the euro area in 2004, ending the year at 3.8 per cent. In the 1st half of 2004 the yield spread to the euro area was more or less constant at approximately 25 basis points, but towards the end of the year and the beginning of 2005 the spread narrowed to approximately zero, cf. Chart 17. The 30-year mortgage rate was 5.0 per cent at end-2004, against 5.4 per cent at the beginning of the year, cf. the statistics of the Association of Danish Mortgage Banks. The corresponding short-term mortgage rate, calculated on the basis of 1- and 2-year mortgage bonds, fluctuated between approximately 2.1 and 2.5 per cent during 2004 to 2.5 per cent at year-end, against the background of Danmarks Nationalbank's unchanged lending rate of 2.15 per cent.
In the UK the yield on the benchmark 10-year government bond matched the corresponding yield in the euro area with a virtually constant spread in the 2nd half of 2004, cf. Chart 17. The tendency of recent years for the yield spread to the euro area to widen, attributable among other things to the Bank of England's raising of interest rates, was reduced. At the beginning of 2005 the yield spread widened again, however, and at the end of February 2005 the 10-year yield in the UK was 4.8 per cent. The Bank of England raised the repo rate on four occasions in 2004, by a total of 1 per cent to 4.75 per cent.
In Sweden the yield on the benchmark 10-year government bond was 4.0 per cent at end-2004, against 4.8 per cent at the beginning of the year. After a period with an almost constant 10-year yield spread to the euro area of approximately 50 basis points, the Swedish yield spread narrowed during 2004 and the beginning of 2005, to 18 basis points, cf. Chart 17. The narrowing is attributable among other things to Sweden's low rate of inflation and to the lowering of the Swedish official interest rate. In February and April 2004, Sveriges Riksbank thus reduced the repo rate by a total of 0.75 per cent to 2 per cent.
At end-2004 the yield on the benchmark Norwegian 10-year government bond was 4.0 per cent, against 4.6 per cent at the beginning of the year. The Norwegian yield has gradually approached the European level since mid-2002, cf. Chart 17, in step with the reductions of the official interest rate. In the 2nd half of 2004 the Norwegian interest rate was at the same level as the Swedish interest rates, but was more volatile. Norges Bank lowered its official interest rate – the sight deposit rate – on two occasions in the 1st quarter of the year, by a total of 0.5 per cent to 1.75 per cent.
The yield on the benchmark 10-year Japanese government bond continued to fluctuate around a very low level throughout 2004. Towards the end of the year, the long-term Japanese yield was 1.4 per cent, unchanged from the beginning of the year. The Bank of Japan has maintained the discount rate at 0.1 per cent since September 2001.
In the new EU member states Poland, the Czech Republic and Hungary, the yield on the respective 10-year benchmark government bonds followed the yield in the euro area, cf. Chart 18, although with greater volatility. In all three countries, the yield spread to the euro area widened slightly in the 1st half-year and then narrowed almost equivalently in the 2nd half-year. At end-2004 the 10-year yield spreads to Germany were approximately 220, 50 and 350 basis points for respectively Poland, the Czech Republic and Hungary. The yield spreads of the three member states to the euro area vary, e.g. as a result of different inflation trends, and in Hungary's case recent incidences of currency unrest.
| 10-YEAR YIELDS IN POLAND, THE CZECH REPUBLIC AND HUNGARY |
Chart 18
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| Note: Weekly observations. For the euro area, the yield on a 10-year German government bond is applied. | |
| Source: EcoWin. | |
STOCK MARKETS
The global stock markets rose moderately in 2004, cf. Chart 19. The stock markets in the USA and Europe started the year on a positive note, and rose in the two first months of 2004. In March increased uncertainty following the terrorist attack in Madrid pushed down stock prices, however. Against the background of oil-price rises, ambiguous US job figures and the prospect of monetary-policy tightening in the USA, a general declining trend was then seen until the middle of the 3rd quarter, when stock prices began to rise again.
| STOCK INDICES FOR THE USA, EUROPE AND JAPAN |
Chart 19
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| Note: Weekly observations. | |
| Source: Bloomberg. | |
The considerable price increases in the last months of the year took place after the uncertainty concerning the outcome of the US presidential election was eliminated in early November. Generally falling oil prices after the record-high level in October also supported higher stock prices. At the beginning of 2005 European stocks have risen, while the stock markets in both the USA and Japan are by and large unchanged.
Indicators of the expected future fluctuations in the stock markets in Europe and the USA are currently at a substantially lower level than in the preceding years. This implies that the market participants deem the current uncertainty in the stock market to be low, which has had a positive impact on stock prices in terms of lower risk premiums on stocks.
In the USA the technology-based Nasdaq index followed the broad S&P 500 index, although the decline at the beginning of the 3rd quarter hit Nasdaq harder, cf. Chart 19. A major contributing factor was lower earnings expectations among the largest technology enterprises.
The Japanese Nikkei index increased more than the stock markets in the USA and Europe in the 1st quarter, among other things on the basis of a positive outlook for the Japanese economy. However, weaker performance of the Nikkei index in the rest of the year meant that the increase at the end of 2004 was in line with the other benchmark stock indices.
The tendency for the US and European stock markets to move in sync continued in 2004.
The generally positive stock-price development in Europe conceals a certain variation between the countries. While the stock indices in the largest European countries have shown moderate increases, the Scandinavian stock markets have fared better than Europe in general, cf. Chart 20. The increase in the Danish KFX index is mainly attributable to substantially rising stock prices in the financial and pharmaceutical sectors, which both carry much weight in the index. In Sweden the electronics company LM Ericsson alone accounted for almost half the increase in the Swedish OMX index. The development in the Norwegian OBX index is partly attributable to oil companies and shipping companies, among others, that benefited from rising oil prices and freight rates.
| SCANDINAVIAN STOCK INDICES |
Chart 20
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| Note: Weekly observations. | |
| Source: Bloomberg. | |
Stock prices in the energy sector have risen more than the stock market in general in both the USA and Europe, cf. Chart 21. This primarily reflects the oil price hikes in 2004.The European energy shares could not match those in the USA in the 2nd half-year, however. This should be viewed against the dollar's weakening in this period, reducing the value of the European energy producers' earnings stated in euro.
| STOCK INDICES FOR THE ENERGY SECTOR IN THE USA AND EUROPE |
Chart 21
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| Note: The US stock index is S&P 500, the European index is DJ Stoxx 600. | |
| Source: Bloomberg. | |