The US Dollar is broadly stronger against most major currencies ahead of today's FOMC announcement. Operation Twist, as it is known, will involve selling short-term Treasuries and use the proceeds of maturing securities to buy longer-term government debt, ultimately driving down long-term interest in efforts to boost economic growth. Meanwhile, US Existing home sales increased considerably in August to 7.7%, following a 3.5% drop in July, according to the National Association of Realtors. However, current dollar gains seem to be driven primarily from continued concern about Europe's financial debt crisis.
The euro extended its losses against the USD despite the news that the ECB will lend $500m to a European bank, suggesting that a policy response is in place. Anxiety builds as no final decision is released about the next tranche of aid (EUR8bn) and as Greece attempts to implement further austerity measures. It is now expected that markets will not hear a final decision until next week.
The British pound traded lower against the USD as dovish MPC minutes detailed a unanimous vote to keep interest rates on hold at 0.5%. The BoE estimates that its QE to date has added between 0.75% to 1.5% to inflation since August CPI of 4.5% y/y, and still rising. It is less likely that a unanimous agreement for another round of asset purchasing will be introduced in the near-term and the lack of new options will add negative pressure to the currency.
The Japanese yen continued its gain vs. the USD, nearing a record high as uncertainty hovers over whether the FOMC has what it takes to boost the stalling US economy. If the Fed succeeds in pushing long-term rates lower, Japanese investors could be encouraged to sell Treasuries and repatriate the proceeds, adding further pressure on the yen. We expect that risk aversion may lead to more yen strengthening, lending to fears that Japan may try to weaken the yen through intervention.
The Canadian dollar traded weaker against the USD as Canada's consumer price index came in stronger than expected. Statistics Canada reported annual inflation rate in August jumped to 3.1% from 2.7% in July as consumer goods and services continued to add upward pressure. Goods and services included vehicles, electricity, home and mortgage insurance and telephone services. Increasing prices will likely limit the ability for the Bank of Canada to remain dovish for long, adding pressure to interest rate hikes in 2012.
The New Zealand and Australian dollar extended losses against the USD after Reserve Bank of New Zealand, Governor Alan Bollard, said the currency is overvalued and a rise in rates will take time. Interest rates in New Zealand are currently at 2.5 percent. The Australian dollar pared losses against the USD after Reserve Bank of Australia, Deputy Governor Ric Battellino, said Australia should prove resilient to the drag from a weaker United States. Even as rates are kept on hold, investors have reached a pessimistic assessment, which may be based mainly on the assumption that the weakness in US and Europe will extend to Australia.
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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..