The dollar rally turned out to be a one day wonder, as currency markets shifted their focus back to the risks of the US economy and rallied the EURUSD above the 1.4700 level in early European trade.
â€˘ Japanese Yen: Higher as rumors of PBOC hike spread
â€˘ Euro: Back above 1.4700 as dollar retreats on slowdown concerns
â€˘ British Pound: Above 1.9500 but market awaits MPC minutes BoE speak
â€˘ Canadian Dollar: CPI and Wholesale sale on tap
â€˘ US Dollar: Only NAHB data on the docket
The dollar rally turned out to be a one day wonder, as currency markets shifted their focus back to the risks of the US economy and rallied the EURUSD above the 1.4700 level in early European trade. Report in the Financial Times noted that US banks have quietly borrowed upwards of $50 Billion from the Fed using the new Term Auction Facility set up by US monetary authorities to relieve the credit crunch conditions prevailing throughout the market.
The $50 Billion figure â€“ a significant sum of money - surprised the market as it revealed the extent of the underlying problems in the US financial system with banks forced to turn to the Fed as the lender of last resort for their capital needs. The euro was also aided by comments from Jean Claude Junker the head of EU Finance Ministers who noted that while â€ś"08 growth expectations are below potential, EZ wonâ€™t be heavily affected by US subprime,â€ť stating that there will be â€śno need for US-style fiscal stimulus.â€ť Mr. Junker words suggested that EZ officials remain relatively sanguine about the economic prospects in the region and implied that any speculation of ECB easing is premature.
In the past few weeks, the euro has come under heavy assault on fears that ECB will soon be forced to follow the Fed towards a more accommodative monetary policy. However, if market perception changes, with traders coming to a consensus that EZ rates will remain at 4% for at least the first half of 2008, the unit could regain its upward momentum and challenge new highs as interest rate differential dynamics come back into play.
Finally, the yen rallied today despite the fact that Nikkei ended the day on positive note and risk appetite remained healthy. The reason for yenâ€™s strength was the report that Chinese inflation accelerated to 7.1 percent in January â€” its highest rate in 12 years â€” after devastating snowstorms worsened food shortages, setting back government efforts to cool rising prices. Worries that inflation could rise further due to high costs for coal and other industrial materials have sparked rumors of a possible rate hike from the PBOC which would strengthen the yuan and in turn help the yen. With China now Japanâ€™s largest export market, a rise in the Yuan would increase the value of Japanâ€™s earnings in the region helping to underpin the yen. With USDJPY beginning to diverge significantly from the usual carry trade dynamics we invite you to read our special report Is The Correlation Between Carry Trades And Equities Fading?
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