The Fed is widely expected to cut interest rates by 75 bp when it meets next week but reports are now suggesting that the Feds could also implement a series of other measures to improve liquidity conditions. These include the Fed purchasing mortgage backed securities issues and offering to lend directly to non-banks. These reports have helped elevate sticks markets in Asia and Europe pushed up the yields on US treasuries as investors concern about the health of the US financial sector drops slightly.
The euro was trading with an everlasting incline against the dollar following a stronger than expected economic sentiment from both Germany and the EU. However with the rumors suggesting new measures by the US Feds, tables turned slightly as the euro looses grounds against the US dollar recording at this hour a low of 1.5301 after recording a high of 1.5495. As for now, the euro is gathering momentum inclining slightly against the dollar as firmer than expected reading indicates that investors in the EU are becoming more optimistic that they can avoid the worse of the fallout from the US slowdown.
Despite the EU's largest economy, the German economy continues to be on a solid up trend, there is still a downside risk to growth accompanied by inflation pressures which remains to be a key cause of concern for the ECB suggesting that the central bank is unlikely to support a cut in the benchmark interest rates in the near term.
Earlier the British pound dropped against the dollar following suppressing news on the UK housing and retail sales. Adding to the downside turn of the pound was as mentioned above rumors that the Feds are planning to lend $200 billion in changes for mortgage-backed securities to try to ease the crisis in the credit markets. Surly this damages the outlook of the pound currently, dragging the pair with it to record a low of 1.9995 after recording a high of 2.0030.
While the BOE in the near term seems settled about setting interest rates on hold, analysts continue to believe that the weaker growth of the economy despite the rising inflation, will force the Bank of England to cut in rates down to 4.25bp from the current 5.25bp in the first quarter of 2008 given the dovish position the BOE holds.
Elsewhere while the dollar was shaky against the pound and the euro, it remained relatively firm against the Japanese yen as investors' risk appetite grew partially driven by news that the Feds are considering a serious of new measures to improve the conditions in the financial markets. This has given the USD/JPY pair the support it needs to pick up to record at this hour a high of 103.53 and a low of 101.44.
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