The following is the weekly money market review by IBQ:

The US Federal Reserve reduced its monthly bond purchases from USD 85 billion to USD 75 billion, the first step toward undoing the extraordinary stimulus that Chairman, Ben Bernanke, initiated to help the US economy recover from the recent recession.

The decision came after an “improved outlook for the jobs market,” as stated by Bernanke. The US Dollar gained significantly against most of its major counterparts, after the US announced the beginning of the reduction of the Quantitative Easing (QE) programme, which is seen to have debased the US currency, reinforcing prospects that the world’s largest economy is improving.

The move also prompted investors to take on more risk as the US Federal Reserve improved their outlook for the economy, pushing stocks to reach record highs. The Dow Jones Industrial Average rose by 292.71 points to touch a high of 16,174.05, while the S&P 500 rose to a high of 1,811.08 following the Fed’s announcement.

The US Dollar maintained its strong footing despite a higher-than-expected surge in initial jobless claims. The Euro started at 1.3735 and reached a high of 1.3811. The currency then quickly dropped against the US Dollar amid the Fed’s tapering announcement and after S&P’s downgrade of the European Union’s long-term rating. The Fed’s decision signals improvement in the labour market signalling higher rates in the near future, which boosted the US Dollar against the currency. On the other hand, the Eurozone’s lacklustre economic recovery forces the European Central Bank to keep rates at historical lows driving the Euro lower. The single dropped to a low of 1.3623 and closed the week at 1.3671.

The British Pound Sterling also dropped against the US Dollar amid the Fed’s decision. However, the currency maintained its strong footing and closed higher.  The pound opened at 1.6294 and surged to a high of 1.6483 amid volatile trading during the Fed’s announcement. The currency reached a low of 1.6219 and closed at 1.6333.

The Japanese Yen continued to drop against the US Dollar as the Bank of Japan (BoJ) kept their monetary policy unchanged. The Bank also maintained its view that the economy is continuing to recover moderately. The US Dollar reached 104.59, a five-year high against the Yen. Additionally, the market is expecting the BoJ to continue its ultra-easy monetary policydespite the Fed’s decision. The pair opened at 103.13 and dropped to a low of 102.47. The US Dollar then surged to 104.59 and closed the week at 104.07.

The Australian Dollar lost heavily last week. Opening at 0.8946, it dropped to a low of 0.8820, a three-year low. The currency traded near its low and closed at 0.88.

Unchanged consumer prices: The US cost of living was unchanged, signalling that it will take time for inflation to approach the level desired by Federal Reserve officials. Lower petrol, new cars and clothing prices held the Consumer Price Index unchanged.

Existing home sales decline: Previously owned US home sales declined for the third consecutive month to the lowest level of the year as rising mortgage rates and a limited supply of properties discouraged buyers. Purchases dropped 4.3% to a 4.9 million annual rate, the National Association of Realtors said.

Unemployment claims rise: Jobless claims climbed by 10,000 to 379,000.

Europe

German investor confidence rises: German investor confidence rose to the highest level in more than seven years, showing signs that the recovery in Europe’s largest economy is strengthening. The ZEW Economic Sentiment Index of investor and analyst expectations, which aims to predict economic developments six months in advance, jumped to 62.0 from 54.6.

EU loses triple A rating: The European Union lost its top credit rating from S&P, which indicates the deteriorating creditworthiness of the bloc’s 28 member nations. S&P cut its long-term rating on the EU to AA+, with a stable outlook from AAA and maintained its short-term rating at A-1+.

United Kingdom

UK inflation unexpectedly slowed to the least in four years, moving closer to the Bank of England’s (BoE) 2% prediction of inflation. Consumer prices rose 2.1% from to 2.2%.

BoE minutes: The nine-member Monetary Policy Committee was unanimous in voting to keep interest rates on hold at 0.5% and to leave the Bank’s GBP 375 billion of bond purchases unchanged. The policy makers said that a stronger British Pound Sterling, and government steps to limit household energy bill rises, had improved the inflation outlook.

Inflation could hit its 2% prediction for the first time in more than four years, the minutes said, as smaller rises in utility bills could reduce inflation by 0.15% compared to previous forecasts. Britain’s economy has strengthened, with 0.8% growth and BoE predicts expansion of 2.8% next year, above the long-run average. However, output is still 2.5% below its pre-crisis peak.

Gold plummets

Gold extended its drop against the US Dollar to reach its lowest level as the Fed lowered its expectations for both inflation and unemployment. The metal was one of the hardest hit by the Fed’s announcement to taper its QE programme by USD ten billion to USD 75 billion. Gold reached a low of USD 1,185.10 and closed the week at USD 1,203.92.

@The Peninsula