The US dollar fell for a third day in a row as Fed Chairman Bernanke said that the unemployment rate will likely remain elevated for some time. However, the comments came after the biggest two-month drop in the unemployment rate since 1958. Compounding the dollar's woes, unlike other global central bankers, Bernanke skirted the issue of inflation, saying that while the Fed does remain vigilant in keeping price pressures in check, he does not see any immediate danger. The USD has fallen against seven of the G10 currencies as investors begin to believe that despite generally improved economic data in the US, the Fed will be slow to tighten policy in 2011, and even into 2012. With relatively flat commodity prices and little economic data due, currency traders will have their eyes on treasury yields and developments in the Middle East for today, while gauging the prospects of normalization of US interest rates.
The euro gained against all of the G10 currencies overnight as positive economic data outweighed speculation that German Bundesbank member, Max Weber will neither seek reelection nor request a post with the ECB. Weber has been one of the ECB's main critics over the past year. His hawkish commentary rattled even the vigilant ECB President Trichet this past summer when Weber publicly criticized the Bank's loose policies and decision to buy bonds last year, prompting Trichet to make it clear that Weber's view was not the position of the governing council. Investors are generally optimistic about the Euro Zone's economic future, as data yesterday showed that while Industrial Production dropped 1.5% last month, missing expectations of a 0.2% gain, exports grew in Europe's largest economy by 0.5% month over month. A separate report showed that business expectations in Germany increased to the highest since early 2007, with anticipation of a rise in exports gaining the most. Despite the hole that Weber's absence may leave, the ECB's stance will likely remain unchanged, and investors still see the ECB as more likely to hike rates than the Fed. With the hawkish outlook for Euro Zone monetary policy, the common currency will likely remain well supported in its recent ranges as investors are focused on economic growth prospects.
Sterling gained against the dollar this morning, but fell against the euro after disappointing economic data. A report showed that the UK trade deficit unexpectedly widened to a record high in December, solidifying bets that the BoE will leave interest rates unchanged at a record low during their policy meeting tomorrow. Cable did however, manage to gain against the USD after dovish commentary from Fed Chairman Bernanke led the dollar lower against all of its major counterparts. With the BoE still one of the most unpredictable central banks, currency investors will likely remain on hold for today with their focus squarely on tomorrow's policy meeting.
The Australian dollar has come under pressure this morning ahead of key employment data due tomorrow. Economists expect a labor market report to show that the Australian economy added 15K jobs last month, keeping the unemployment rate static at 5.0%. However, after nearly a month of flooding of biblical proportions in the Queensland region, the numbers could be heavily skewed to the downside. RBA Governor, Glenn Stevens, has warned investors that the numbers may not meet expectations, but he is urging markets to look through the impact of the recent natural disasters, and remain focused on medium to long-term inflation risks. The aussie has also seen the lasting effects of China's most recent hike in interest rates as the world's second largest economy attempts to curb inflation and stave off potentially dangerous asset bubbles.
Emerging market currencies have also felt the impact of the hike in Chinese interest rates as many EM markets are strongly dependent on Chinese consumption of their raw material exports. Prospects for slower global growth have weighed on currencies from the ILS and TRY to the ZAR and MXN as the export-led growth in these countries is dependent on not only steady consumption in the US and Western Europe, but also growing demand in China. While these currencies have garnered significant investor interest, thanks to relatively high interest rates, today's market has investors focused on G10 growth prospects, and whether rising inflationary pressures in the Euro Zone and US will cause either the ECB or Fed to tighten policy in the near term. Higher rates in the G10 nations would reduce some of EM nation's appeal, and could also potentially slow global growth. While these high-yielding currencies gained on positive economic data as of late, further appreciation may be capped until the policy outlook is solidified in G10 nations.
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This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends.