Exchange Rates Update - Japan takes centre stage for the day

A quiet start to the trading week saw the pound fall against the euro but the biggest movement was on the US dollar where apparent progress between President Obama and the Republicans to avert the so-called ‘fiscal cliff’ continues to improve risk sentiment thus hurting safe haven flows into the dollar.

The only bright spot for the dollar was against the Japanese yen. The dollar reached a nineteen month high against the Yen yesterday after the Liberal Democratic Party won a landslide victory in Japan's general election on Sunday. New Prime Minister, Shinzo Abe, has pledged that the Bank of Japan will be more aggressive in its efforts to stimulate economic growth in the country and tackle deflation in the country, the world's third largest economy.

In the US, President Barack Obama yesterday offered to back away from his position that tax hikes should begin at a $250,000 annual income level. Reports suggested that the level will now be set at $400,000 and match a $1 trillion of tax rises with a $1 trillion of spending cuts.

In the euro zone, all eyes are on Italy and the final decision from outgoing technocrat Prime Minister Mario Monti regarding his future political plans. Monti announced his intention to step down after the Italian Parliament passes his 2013 state budget after Silvio Berlusconi’s party withdrew their support. Many European leaders are urging Monti to enter the race as he has engineered a calm, steady balancing act since taking over from Berlusconi. Many also fear Berlusconi's anti-austerity remarks.

Meanwhile, a report from the so called troika, the European Commission; European Central Bank and the International Monetary Fund on the Greek government’s efforts to meet its targets under the €130 billion bailout suggests there are "very large" risks to the recently negotiated Greek bailout package.

Whilst the report approves the release of the next tranche of funds to the Greek government, it warns that the recession bound country could still fail to meet the commitments it had given. This is in part because of political resistance and court challenges to the austerity programme.

In the UK, figures suggest that the new Bank of England’s flagship cheap loans scheme is likely to fall short of its £80 billion target. Data from the Bank’s Quarterly Bulletin show that banks and building societies could be penalised if they use the Funding for Lending Scheme (FLS) but shrink their loan book by more than 3%. At launch, the UK Treasury said the scheme was intended to lower borrowing costs on the £80 billion of the UK loan stock thus driving more and cheaper credit through to households and businesses. However, in practise, it now seems that the scheme will only reach a level of £50 billion.

The Bank of England survey also showed that the poor have seen their incomes squeezed more than the rich over the past twelve months as households cut back on spending to ease debt levels. The survey found that 62% of households in the lowest quartile of the income distribution said that their after-tax income declined over the past year. This contrasts sharply with 48% of those in the top quartile of earners who reported a drop in after-tax incomes.