Friday June 26, 2009 - 14:59:10 GMT
Share This Story
BHF-Bank - www.bhf-bank.com
FX Briefing - Dollar weaker after FOMC meeting
FX Briefing 26 June 2009
- Fed sticking to monetary policy stance, sees situation stabilising gradually
- ECB injects â‚¬442bn into the money market in one-year tender
Dollar weaker after FOMC meeting
During the course of the week, the dollar has retreated somewhat. EUR-USD rose to about 1.41, whereas, towards the end of the week, USD-JPY was around 95.50. The Swiss franc did not follow this movement, however, nor did some commodity-linked currencies such as the Norwegian krone, the Canadian and Australian dollar.
The US currency started the week on a firm footing against the euro. This probably reflected market participantsâ€™ more sceptical view of the economic outlook, which was also evident in falling equity and commodity prices. Furthermore, the World Bank revised its global economic growth forecast for 2009 down substantially from â€“1.7 to â€“2.9%. Markets were worried that the Fed could take action to prevent interest rates rising at the long end of the curve, and thus dampen their cautious optimism even further.
On Tuesday, the dollar lost ground. As the day progressed, EUR-USD rose â€“ as though pulled by a string â€“ from around 1.3830 in the morning to over 1.41 towards the evening. The reasons for this are hard to discern. Maybe markets had come to the conclusion that the Fed and other central banks would maintain their extremely expansive monetary stance, in order to kick-start economic recovery. Remarks made by a member of the rating agency Moodyâ€™s confirming the AAA rating for the US (and also for the UK) could have played a part as well. Last but not least, the auction of a staggering $104bn of T-notes could have had an impact too.
Then, on Wednesday, EUR-USD dropped below 1.3950. This movement was probably triggered primarily by two factors: first, the ECBâ€™s first one-year refinancing operation, which, at a record â‚¬442bn, exceeded all expectations, which had been high anyway. Market participants interpreted this as a sign that the ECB regarded the situation as more critical than indicated in the official statements. Second, the US currency benefited from the intervention of the Swiss National Bank in the forex market. The SNB made no formal declaration, but traders reported of massive intervention by the SNB and, on its behalf, the BIS. For the first time, US dollars were purchased as well as euros.
The FOMC meeting on Wednesday evening ended with no big surprises. The statement contains something for everyone: the Fed sees gradual stabilisation progressing, but maintains that economic activity is likely to remain weak for a time. Moreover, the central bank dropped the warning that inflation could run below desired levels for a time. All in all, however, the open market committee confirms its monetary policy stance, and its intention to continue to purchase agency debt, agency MBS and Treasury securities. The Fed now states, however, that it will make adjustments to its credit and liquidity programmes as warranted.
After the statement, the dollar firmed initially, but started to weaken again later on. In our view, this is mainly due to the marketsâ€™ interpreting the Fed decision as â€śbalanced and growth orientedâ€ť: fears that either an increase in long-term interest rates or an early exit from QE could suffocate any nascent economic recovery, seem to have subsided somewhat after recent yield falls and the reassuring FOMC statement. For the forex market, the continuation of the expansive monetary policy means that international investorsâ€™ risk appetite will grow, which would theoretically bolster carry trades.
In this â€śbest of a bad bunchâ€ť scenario â€“ economic stabilisation and low interest rates â€“ the dollar is losing ground. How the US currency would react in less favourable circumstances, remains to be seen, however. At first glance, a fresh escalation of the crisis should boost the dollar as a safe haven; at present, there is a close correlation between EUR-USD and the equity market. However, this will not necessarily be the case: the US debt situation and financing requirements â€“ particularly in connection with the discussion about its role as a reserve currency, are more against the dollar. Furthermore, it is feasible that the US might step up political pressure to depreciate the dollar, in order to kick-start its economy again. On the whole, the risks for the dollar could predominate slightly at present.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NĂ¤fken
+49 69 718-2688
This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHF-BANK Group") solely for the information of its clients. The information and opinions in this document are based on sources believed to be reliable and acting in good faith, but no representation or warranty, express or implied, is made by any member of the BHF-BANK Group as to their accuracy, completeness or correctness. Opinions and recommendations are given in good faith but without legal responsibility and are subject to change without notice. The information does not constitute advice or personal recommendation, for which the duty of suitability would be owed, but may facilitate your own investment decision. Moreover, you should seek your own advice as to the suitability of an investment matter mentioned herein. Investors are reminded that the price of securities and the income from them can go down as well as up and that the past performance of an investment or a market is not necessarily indicative for future results. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete, and this document is not, and should not be construed as, an offer to sell or solicitation of any offer to buy the securities mentioned in it. BHF-BANK Group and its officers and employees may have a long or short position or engage in transactions in any of the securities mentioned in this document, or in any related securities. This publication must not be distributed in the United States.
Â© 2007 BHF-BANK Aktiengesellschaft
All rights reserved. Please mention source when quoting from it.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."