The US Dollar consolidated in its recent ranges overnight as investors await the all-important conclusion of the Fed's FOMC meeting tomorrow. With expectations high that Fed Chairman Bernanke may announce some form of further monetary easing, even though his options are running thin, global equities have staged a relief rally after yesterday's sharp declines. However, risk assumption has been tepid at best with continued concerns over the fiscal health of the Eurozone nations and the global economy as a whole. The dollar's gains have also slowed this morning as the domestic political environment begins to polarize yet again after President Obama announced a plan for increasing taxes. After the debt and budget battles earlier this year contributed to the downgrade of the US's sovereign debt rating, the hardening battle lines will be closely monitored heading into the 2012 election cycle. The USD has however found support against its major peers after East Asian currencies fell sharply on fears of a global slowdown. With Asian central banks' USD foreign currency holdings thus increasing in value, their diversification process (essentially selling dollars for euros) has consequently slowed. In the near term, the USD will likely remain within its recent ranges ahead of the Fed decision tomorrow.
The EUR begins the day relatively unchanged from yesterday's close after trading through a particularly choppy overnight session. The common currency was hit in early Asian trading after S&P unexpectedly downgraded Italy's sovereign credit rating from A+ to A, the nation's first downgrade in five years. The ratings agency cited slowing growth, a fragile political system and rising borrowing costs as unsustainable in light of its massive debt load. Italy is the fifth Eurozone member to have its credit rating downgraded over the past year as investors fear that the debt contagion that has plagued Greece since the summer of 2010 will engulf the larger Eurozone economies. The Italian government is furious over the downgrade after its austerity measures passed earlier this month were enough to convince the ECB to buy its bonds. The move will also likely significantly increase Italy's borrowing costs with the nation still set to sell 50B EUR of bonds before the end of the year. Nevertheless, the EUR has remained relatively flat ahead of tomorrow's key Fed decision in the US.
Sterling is trading in an increasingly narrow range against the USD, and continues to gain against the EUR. The pound's relative safety has provided support against its mainland counterpart over the past several months, with the sentiment reinforced yesterday evening after S&P downgraded Italy's credit rating. However, with the BoE apparently near a second round of quantitative easing, the GBP has still been one of the worst performing currencies over the past 12 months, falling 5.4% against its G10 counterparts. Investors will take note of the release of minutes from the BoE's last meeting, due tomorrow, to look for any clarity on plans for further economic stimulus.
The JPY is stronger, up against the USD despite the unveiling of a government program to suppress the ongoing strength of the Japanese yen. Due to safe-haven flows generated by market turmoil, the yen has maintained its strength, which has added pressure on Japanese officials to intervene. However, the effectiveness of any government intervention remains a primary concern.
Commodity Currencies were mixed as the price of gold broke $1,800 and crude oil jumped $2 to $87.10 in early trading. The CAD was lower against the USD after the BoC said it had bought C$500M government bond issues in a cash management bond repurchase program. On the other hand, the AUD strengthened as commodities recovered from yesterday's declines, despite the RBA's announcement to maintain its cash rate steady at 4.75%. Notes from the RBA meeting did however point to growing concern that inflation may be difficult to contain, leading investors to reduce bets the Bank will cut rates before the end of the year. The AUD remains well positioned for ongoing demand, Australia's mineral and energy exports are expected to jump 21% in fiscal 2012 as Asia's resource driven economies extract as much as commodity economies can produce.
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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..