Anatole Koetsky writes: The US dollar is hitting new 12-year highs almost daily, while the euro seems to be plunging inexorably to below dollar parity. Currency movements are often described as the most unpredictable of all financial variables; but recent events in foreign-exchange markets seem, for once, to have a fairly obvious explanation – one that almost all economists and policymakers accept and endorse.

French President François Hollande, for one, has ecstatically welcomed the plunging euro: “It makes things nice and clear: one euro equals a dollar,” he told an audience of industrialists. But it is when things seem “nice and clear” that investors should question conventional wisdom. A strong dollar and a weak euro is certainly the most popular bet of 2015. So is there a chance that the exchange-rate trend may already be overshooting?

In one sense, the conventional explanation of the recent euro-dollar movement is surely right. The main driving force clearly has been monetary divergence, with the Federal Reserve tightening policy and the European Central Bank maintaining rock-bottom interest rates and launching quantitative easing. But how much of this divergence is already priced in? The answer depends on how many people either are unaware of the interest-rate spread or do not believe that it will widen very far.

Last year, many investors questioned the ECB’s ability to launch a bond-buying program in the face of German opposition, and many others doubted the Fed’s willingness to tighten monetary policy, because doing so could choke off the US economic recovery. That is why the euro was still worth almost $1.40 a year ago – and why I and others expected the euro to fall a long way against the dollar.

But the scope for dollar-bullish or euro-bearish surprises is much narrower today. Does anyone still believe that the US economy is on the brink of recession? Or that the Bundesbank has the power to overrule ECB President Mario Draghi’s policy decisions?

With so much of the monetary divergence now discounted, perhaps we should focus more attention on the other factors that could influence currency movements in the months ahead.

On the side of a stronger dollar and weaker euro, there seem to be three possibilities. One is that the Fed could raise interest rates substantially faster than expected. Another is that investors and corporate treasurers could become increasingly confident and aggressive in borrowing euros to convert into dollars and take advantage of higher US rates. Finally, Asian and Middle Eastern central banks or sovereign wealth funds could take advantage of the ECB’s bond-purchase program to sell increasing proportions of their German, French, or Italian debt and reinvest the proceeds in higher-yielding US Treasury securities.

Four factors could push the dollar-euro exchange rate the other way.

1.  If the dollar continues to rise, US economic activity and inflation will weaken. In that case, the Fed, instead of raising interest rates faster than expected, will probably become more dovish.

2. There must be serious doubts about whether Asian and Middle Eastern governments will in fact want to shift more reserves into dollars, especially if this means converting the euros they have acquired since 2003 at a loss and far below their purchasing power parity.

3.  The euro’s downward trend against the dollar may not last much longer because there is the trade imbalance between the US and Europe.

The implication is that hundreds of billions of dollars of capital will have to flow annually to the US from Europe just to maintain the present euro-dollar exchange rate.

4.   While higher US interest rates will attract some investors, others will move away from the dollar if the combination of a more competitive euro, the ECB’s enormous monetary stimulus, and an easing of fiscal pressures in France, Italy, and Spain generates a genuine economic recovery in Europe.

What, then, can strike a balance between the opposing forces operating on the euro-dollar exchange rate? No one can say for sure.

Megan Wilson and Peter Schroeder write: Federal Reserve Chair Janet Yellen is upping her outreach to Capitol Hill, and one lawmaker is attracting the largest amount of her attention: Sen. Elizabeth Warren (D-Mass.).

A review of Yellen’s meeting records, obtained by The Hill, shows the Fed chief has had more than twice as many meetings and phone calls with the big bank critic as any other lawmaker.

Starting back in 2013 — the year former Fed leader Ben Bernanke announced he would retire — then-Vice Chair Yellen’s contacts with Congress began to increase. She held dozens of private meetings with senators in the months before and after her Senate confirmation hearing.

However, Warren was among the first lawmakers to approach Yellen in February. Records show the call lasted 30 minutes.

In 2013 and 2014, Warren had two phone calls and five meetings with Yellen. Rep. Maxine Waters (Calif.), the top Democrat on the House Financial Services Committee, had one meeting and two phone calls. Senate Democratic leader Harry Reid (Nev.) also spoke with Yellen three times.

Warren’s outsize presence in Yellen’s daybook is yet another indication that, while low in Senate seniority, the prominent bank critic commands significant attention from influential people.

Yellen, for instance, on Dec. 2 went from an hourlong lunch with Warren at a Federal Reserve dining room to a meeting with Jamie Dimon, the head of JPMorgan Chase.

Warren’s office declined to comment on her frequent meetings with Yellen.

Sarah Binder, senior fellow at the Brookings Institution, said that speaking most often with the Massachusetts Democrat does not a friendship make.

She noted that policymakers at this level have notoriously stringent schedules, leaving little time for pleasant chats.

“They don’t have time for nice meetings,” added Binder, who follows the interaction between the Fed and Congress.

Dennis Kelleher, head of the pro-reform group Better Markets, noted that Warren’s status as a low-ranking lawmaker may actually have made it easier for her to spend more time with Yellen. A former Senate staffer, Kelleher noted that more senior lawmakers often are spread out across multiple committees with wide-ranging jurisdictions.

Warren sits on many committees and is intensely focused on regulatory reform.

“Warren both has the time and interest to spend,” he said. “The more senior you get, the less and less time you have.”

The two last interacted in public when Warren sparred with Yellen.

During a hearing last month, Warren accused one of Yellen’s top advisers, Fed general counsel Scott Alvarez, of being uninterested in implementing some portions of the Dodd-Frank financial reform law, forcing Yellen to defend the longtime Fed employee.

It may not all be adversarial, though. Warren has shown that she can be a pragmatist behind closed doors, according to emails from her first months at the newly formed Consumer Financial Protection Bureau. In the documents, she sometimes took a softer tone with the banks she vocally criticized in public.

Warren was also among a handful of Democratic lawmakers to publicly advocate for Yellen to take over for the Fed instead of Larry Summers, the president’s preferred pick. It is rare for lawmakers to publicly advocate for an individual before the president has made a selection.

She is also no stranger to other financial regulators. Records reviewed by The Hill show meetings with Securities and Exchange Commission Chair Mary Jo White and Richard Cordray, head of the Consumer Financial Protection Bureau that Warren helped create.

Warren has helped to lead Democrats in pushing the Fed to take a tougher stance on new rules brought on by the Dodd-Frank financial reform law, while Republicans have often criticized the central bank’s monetary policy.

Yellen’s frequent meetings with lawmakers are likely an indication of lingering concern or dissatisfaction with the Fed’s work in the wake of the financial crisis, experts say.

In her congressional contacts last year, Yellen met with eight Republicans, typically over breakfast or lunch at the Federal Reserve or at congressional dining rooms on Capitol Hill. Among those dining with Yellen were staunch critics of the Fed, including House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and Sens. John Thune (R-S.D.) and Mark Kirk (R-Ill.). The latter two have co-sponsored legislation aiming to audit the central bank.

Yellen — who opposes the audit — said that while she may not always agree with lawmakers, she wants the Fed to be accountable to Congress.

“We have a wide range of responsibilities, and it’s entirely appropriate for me to testify and be quizzed on a range of topics by members of Congress,” she has said.

Overall, the meetings she held with lawmakers were only a fraction of her total schedule. Yellen held roughly 950 meetings during her first year at the helm of the Federal Reserve, according to a tally by The Wall Street Journal, and only reserved 23 for lawmakers.

“The real criticism might be: why aren’t more people talking to the Fed, rather than why is Elizabeth Warren talking to it so much?” asked Kelleher.

Matt Levine thinks and writes:  Up until January 15,  the Swiss franc was capped against the euro and was pretty quiet against the U.S. dollar, trading at about 1.02 francs to the dollar as of that morning. Then the Swiss National Bank removed the cap and the franc spiked to 74 centimes to the dollar, before pretty quickly bouncing back part of the way. It’s now back around parity. If you were short the franc against the dollar at 4:30 a.m. New York time that day, you had lost more than a third of your money less than half an hour later. But half an hour after that, your losses were back to a more manageable 15 percent. And two months later they had pretty much disappeared.

Tormar was down $3.7 million on FX spot and forward transactions, but the bigger losses — responsible for $31.5 million of Citi’s claim — were for option trades. The biggest clusters of trades — assuming I’m reading the statement right! — were put options that Tormar sold on the dollar against the Swiss franc, betting that the dollar wouldn’t decline. 

Citi Prima Brokerage Agreeement

Prime Brokerage Termination Agreement

Dozens of people have been hurt and some 350 people arrested as anti-austerity demonstrators clashed with police in the German city of Frankfurt.

Police cars were set alight and stones were thrown in a protest against the opening of a new base for the European Central Bank (ECB).

Violence broke out close to the city’s Alte Oper concert hall hours before the ECB building’s official opening.

“Blockupy” activists are expected to attend a rally later on Wednesday.

In earlier disturbances, police in riot gear used water cannon to clear hundreds of anti-capitalist protesters from the streets around the new ECB headquarters.

Alan Crawford writes:  German Chancellor Angela Merkel will seek accommodation in talks with Greek Prime Minister Alexis Tsipras to calm the increasingly combative rhetoric between the nations and regain control over efforts to keep Greece in the euro.

Merkel, as leader of the biggest contributor to Greece’s 240 billion-euro ($255 billion) bailout, is willing to go a long way to find a compromise.

After weeks of sparring between Greece and Germany, Merkel is pursuing the talks now to try and get the discussion back on track. Any suggestion that she will deliver an ultimatum to Tsipras is complete nonsense and propagated by those who want to inflame the standoff, the official said.Merkel sees the meetings with Tsipras as more of a chance to get to know him, and doesn’t plan to directly negotiate the details of Greece’s fate, which she sees as a matter between Athens and its creditors, the official said. Her room for leeway on Greece is in any case limited by resistance from within her own parliamentary group, according to the official.

Merkel is convinced that now is the “right time to hold extensive talks,” Steffen Seibert, her chief spokesman, said,  “The talks will be about the situation between Greece and the other members of the euro area and how a way forward can be achieved.”
Acrimonious Exchanges

Tsipras is pinning his hopes to reach a breakthrough on a meeting he’s requested with Merkel, European Central Bank President Mario Draghi, French President Francois Hollande and European Commission head Jean-Claude Juncker on the sidelines of a European Union summit that starts Thursday. Merkel has also invited Tsipras to Berlin March 23 for one-on-one talks.

Euro-region finance ministers are urging Greece to draw up a plan to fix the economy in exchange for emergency loans to keep the country afloat. As Tsipras challenges his creditors to blink first, his government’s money is running out, raising the prospect of a cash crunch as early as this month. The country faces more than 2 billion euros in debt payments Friday, and government salaries and pensions must be paid at the end of March.

The ECB raised the maximum amount of emergency liquidity available to Greek lenders by 400 million euros on Wednesday, less than the about 900 million euros the nation’s central bank had requested, people familiar with the decision said.

Greek banks were cut off from regular ECB funding operations in February, forcing them onto Emergency Liquidity Assistance from the Greek central bank. The Frankfurt-based ECB has the power to curb ELA and is reviewing it weekly amid concern that banks will use it to finance the Greek government and so violate European Union law.

“People have asked us to put an end to austerity and bailout agreements, to begin the process of reclaiming the dignity of the nation,” Tsipras said. “We respond today, tomorrow and on Friday in parliament by building a wall of sovereignty and dignity.”