by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Tuesday, March 18, 2008
The dollar weakened to lows around 1.5830 against the Euro on Tuesday before consolidating just stronger than 1.58 ahead of the FOMC interest rate decision. The dollar drew initial support from better than expected earnings reports from Lehman and Goldman Sachs which eased financial-market stresses.
The Federal Reserve cut the Fed Funds rate by a further 0.75% to 2.25% following the meeting. There was a 8-2 vote in favour of the decision with Plosser and Fisher dissenting and calling a smaller rate cut.
The Fed stated that there were still downside risks to the economy and stresses in the financial markets while the bank would take further action if required. There were, however, also comments that uncertainty over the inflation outlook had increased.
US housing starts were little changed at an annual rate of 1.07mn for February following a significant upward revision to the January data. In contrast, there was a 7.8% monthly decline in building permits to 0.98mn which will maintain a lack of confidence in the housing sector.
ECB officials cautioned against any expectations that there would be a shift in interest rates in the short term and also concentrated on inflation risks which will provide some near-term Euro support.
The dollar held just above 97 in Asian trading on Tuesday as some degree of stability returned.
Domestically, the government proposed Tanami as the new Bank of Japan Governor, but the opposition parties have warned that this nomination could also be rejected which would unsettle the yen to some extent.
The dollar pushed to highs around 98.80 ahead of the Federal Reserve interest rate decision. Markets were anticipating a 1.0% rate and the 0.75% rate cut caused initial selling pressure on Wall Street which boosted the Japanese yen.
The Fed’s stance will, however, also foster hopes that the market situation is not quite as bad as feared and this will provide some support to sentiment and the US currency. As Wall Street rallied again the yen weakened to new lows near 100.0, the biggest one-day dollar gain for over four years. Markets will remain on alert for co-ordinated intervention if the dollar slumps again.
The UK currency found support below the 2.00 level in early Europe on Tuesday and strengthened to highs above 2.0250. The UK currency also tested resistance levels below the 0.78 level against the Euro during the day.
The latest consumer inflation data recorded an increase in the headline annual rate to 2.5% from 2.2% the previous month, but the core rate fell to 1.2% from 1.3%. The benign core reading will increase speculation that the Bank of England will have greater scope for interest rate cuts, but the bank will be very concerned over rising inflation expectations triggered by higher headline numbers and will want to be cautious.
The combination of growth and inflation fears will continue to illustrate the difficulties faced by the Bank of England and will trigger further Sterling volatility.
If financial stresses return quickly, there will be further pressure on the central bank to sanction a near-term cut in rates. The Bank of England minutes for March
will also be watched closely on Wednesday to assess bank fears. A firmer dollar tone pushed Sterling back to 2.0050 later in New York.
Despite gains immediately after the US Federal Reserve decision, the Swiss currency weakened to lows around 1.5670 against the Euro during Tuesday. The US dollar pushed to levels above 0.9950 ahead of the Fed decision.
The franc moves are still correlated strongly with degrees of risk aversion and the franc lost ground as equity markets rallied. In particular, the degree of correlation with financial stocks was very strong. As Wall Street rallied again by over 3% at the close, the Swiss franc weakened back to beyond parity against the US dollar. Volatility will remain very high in the short term.
The Australian dollar has found support below the 0.92 level against the US dollar with a rebound to above 0.9250 in local trading. Domestically, the Reserve Bank minutes from January suggested that the bank would be more cautious over raising interest rates again, especially with a speculation over a wider slowdown in the Australian economy.
Levels of risk aversion will remain very important and the Australian currency will be vulnerable to selling pressure if fears increase. The impact is likely to be offset to some extent by moves in commodity prices as commodities will tend to rise when market stresses intensify. The local currency was unable to hold above 0.9300 as the US dollar secured a wider rally.