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Tension rises over U.S. budget

Tension rises over U.S. budget

World shares retreated from 17-month highs and commodities fell as talks to avert a U.S. fiscal crisis stalled, reigniting fears over the health of the world’s largest economy. The worries over the latest course of events have spread into the commodity markets, leaving gold near its 3-1/2-month low hit earlier in the week at around $1,670 an ounce.

On the currency market, the Bank of Japan’s latest policy move was the main driver of prices. The yen firmed against the dollar and the euro following the Bank of Japan’s widely expected decision to ease monetary policy for the third time in four months as it tries to reverse stubborn deflation. But with trading winding down ahead of the holiday season and following weeks of strong gains in many risk asset markets, many investors seemed ready to use the setback in ending the saga of Washington’s budget deadlock to close out positions.

Meanwhile the Pound  remains under selling pressure for the remainder of the year following yesterday’s Bank of England minutes which prophesied that it is ‘quite likely’ that activity in the UK economy will contract during the final three months of 2012.

On the FX markets, the euro and dollar rallied against the yen after the BOJ’s easing of policy but trading has had little net effect with GBPUSD trading around 1.6260 and GBPEUR at 1.2295 this morning.

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