v US Fed pledges to keep interest rates on hold at 0% - 0.25% until late 2014 and Chairman Bernanke hints at QE3; dollar index drops to a six-week low;
v Commodity Currencies sharply higher on recovering risk appetite;
v Durable Goods gain by 3%, jobless claims rose to 377k and leading indicators gained by 0.4%; GDP data due tomorrow expected to show 3% growth.
The USD is lower against nearly all of its major counterparts this morning after yesterday's pledge from the Fed to keep interest rates exceptionally low until 2014. With US assets yielding all but nothing for at least the next two to three years, investors are seeking higher returns elsewhere. Further weighing on the dollar, Fed Chairman Bernanke paved the way for a third round of large-scale bond buying should unemployment remain at or near its current 8.5% and inflationary pressures continue to ease. While global economic growth continues to fall short of expectations, US data has generally surprised to the upside, leaving investors questioning the Fed's dovish stance. Durable goods orders fell to 3% in December, down from 4.3% in the previous month, but much better than the 2% expected. Weekly jobless claims ticked slightly higher to 377k versus last week's 356k, but the measure remains well entrenched below the key 400K barrier. Leading indicators also fell short of expectations at 0.4%, but were higher than last month's downwardly revised reading of 0.2%. Investors will pay particularly close attention to GDP data due tomorrow, fearing that the Fed announcement must mean that they are positioning for a shortfall the market has not anticipated. While the Fed's lax monetary policy will weigh on the dollar in the short term, the general outperformance of the US economy will provide support in the longer term.
The EUR gained to a five-week high against the USD overnight as European policymakers inch closer to brokering a deal to provide Greece with further financial aid. It appears that European officials understand the severity of the situation should action not be taken, and while a deal is ultimately expected, investors are remaining largely on hold until a final deal is brokered. EU Finance Minister, Jean-Claude Junker told reporters this morning that there's no default without contagion. It is in everyone's interest to avoid a Greek default. However, avoiding the spread of contagion is only half the battle as all estimates point to a mild recession in Europe in 2012. Nevertheless, the common currency is finding support this morning, albeit within its recent ranges.
The GBP rose to the highest levels of the year this morning against the USD, but fell against the EUR. The pound has been helped higher against the dollar after the Fed's dovish statements, but it remains under pressure against most of its other counterparts on the continued flow of disappointing British economic data. UK retail sales slid this month at the fastest pace in nearly three years after a report earlier this week showed that the British economy in fact contracted in Q4 2011, raising the odds of another recession. However, while the BoE is widely expected to introduce a fresh round of quantitative easing in February, the Fed's ultra-dovish stance makes their anticipated actions look comparably restrained.
The JPY regained its footing this morning after falling sharply against the USD and EUR for two straight days. The rise comes despite sobering Japanese debt figures, with the Finance Ministry announcing that the country's public date will likely exceed a quadrillion yen ($14 trillion) for the first time. The figure is 10% higher than this year due to bond sales needed to pay for reconstruction costs from last March's natural disasters. However, with continued strong domestic demand for Japanese government debt, the yen remains well supported as a proxy for market risk.
The Commodity Currencies are sharply higher this morning as investors seek higher yields after yesterday's Fed announcement. Oil gained to $100.70/bbl, gold rose to $1725/oz and copper extended its recent rally to $389/lb. The CAD strengthened sharply overnight, breaking below parity with the USD for the first time in more than three months on the higher price of oil, Canada's main export, and as investors expect the Fed's policies to encourage demand in the US, Canada's main export market. The AUD is also at a three-month high on the resurgence in risk appetite and after a report suggesting that Russia will be adding the AUD to its currency portfolio highlights the Aussie's growing role as an international reserve. The NZD and ZAR also posted strong gains against the dollar as investors assume riskier positions.
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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.