Wednesday September 19, 2007 - 10:28:57 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed stance undermines dollar
The more aggressive than expected Fed rate cut will undermine the dollar in the short term as yield support weakens. The impact will be offset to some extent by the fact that greater confidence in growth prospects will underpin capital inflows.
The dollar traded in narrow ranges ahead of the Federal Reserve interest rate decision and was unable to sustain a break of the 1.3850 level. The US currency weakened sharply to record lows around 1.3980 following the Fedâ€™s rate announcement, but resisted a break through 1.40.
The FOMC unanimously voted for 0.50% cuts in the Fed funds and discount rates. In its statement, the Fed stated that the action was taken to forestall harm to the wider economy caused by the housing downturn. The Fed retained some reference to inflation risks, but downgraded it as an issue and stated that further action would be considered if necessary. The more aggressive Fed stance will undermine the dollar in the short term on yield grounds and a break of 1.40 could lead to further selling, although the cut may also boost confidence in growth prospects which will help support the currency.
Housing foreclosures rose sharply according to the latest data with an annual increase of over 100% and the data will be watched closely on Wednesday for further evidence on the housing sector. Only a surprise recovery in starts and permits would ease short-term fears and provide firm dollar support.
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