As stock markets lifted sharply, the US dollar hit a two month low against a basket of currencies after the Federal Reserve announced it would buy long-dated debt, its first large-scale purchases of government debt since the early 1960s. In an effort to rescue the economy, the Fed Reserve said would inject $1 trillion into the economy allocating $300 billion to long-dated Treasuries in the next six months and $850 billion to buy mortgage-backed securities and agency debt. The Fed’s action to further expand their balance sheet which has already doubled in the past six months will eventually lead to oversupply of the world’s main reserve currency. Although the move imposed risks, optimism was sparked amongst investors that the battered US economy could soon begin its road to recovery, easing the flight to the safe haven currency.
The euro strengthened against the dollar after the Fed’s surprise move to inject more money into the US economy. Meanwhile, European leaders rejected calls to inject more cash into EU economies. They will likely propose boosting International Monetary Fund firepower to contend with the global recession.
The British pound strengthened against the dollar rising to a three week high, despite dismal economic news from the UK. Data showed Britain posted its biggest February budget deficit on record as rising unemployment and a shrinking economy drove tax receipts down 10% on the year. Furthermore, data from the Confederation of British Industry showed the March manufacturing balance was -58, the worst order on books since January 1992. The economic data paints a picture of the depth of the recession in the UK as the economy remains in deep contraction.
The Bank of England said it would buy additional corporate bonds on March 25 in an effort to continue their quantitative easing. Each purchase the BoE makes will be in sizes of 2 to 5 million pounds, and bonds must carry a rating of triple B or above from at least two rating agencies.
The Japanese yen continued its rally against the dollar. Japan’s finance minister welcomed BOJ’s decision to buy more Japanese government bonds, as it has potential to bring down long-term yields making state and corporate borrowing cheaper. However, Bank of Japan Governor Masaaki Shirakawa reiterated that the central bank had no intention of lowering long-term yields, as it may put the BOJ’s credibility on the line and undermine the yen.
The Canadian dollar firmed to a five-week high against the US dollar after data showed Canada’s annual inflation rate was better than expected. Statistics Canada said annual inflation jumped to 1.4% in February despite declines in gasoline and vehicle prices. This morning, oil prices rose above $52 a barrel helping the loonie further strengthen against the greenback.
The Australian and New Zealand dollars benefited from investor’s appetite for risk, as global stocks rallied. Although the Aussie and the kiwi have benefited from the weakening US dollar, some are wary that the Aussie and the kiwi will be able to maintain their recent strength against the greenback. The kiwi’s upward momentum will depend on next week’s Q4 current account and GDP releases.
10-Year Treasury Note Yield: 2.512%
Dow Jones Industrial Average: 7,458.46 – 29.87