U.S. Consumer confidence falls to lowest level since 2011
Euro hits high versus US dollar since early December 2011
Talk of AAA downgrade likely to undermine British currency
USD- The US dollar fell against most of its 16 major peers after data showed U.S. consumer confidence dropped in January to its lowest level in more than a year as Americans were more pessimistic about the economic outlook and their financial prospects. The Conference Board’s index of consumer attitudes fell to 58.6 from an upwardly revised 66.7 in December, falling short of economists' expectations for 64. It was the lowest level since November 2011. The greenback may continue to struggle if the Fed, at the end of its two-day meeting, reinforces expectations for a continuation of quantitative easing beyond this year. Even though last month’s meeting’s minutes showed that Fed governors were divided on whether to continue the QE policy, general market sentiment is that QE will not end during 2013, but rather will continue well beyond that date. If this is the case and the statement from the Fed supports this, then the pressure on the US dollar will increase.
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EUR- The euro rose to a 14-month high against the US dollar, lifted by an improving outlook for the euro zone and expectations the Federal Reserve will maintain its ultra-easy monetary policy for the foreseeable future. Positive German economic data and signs European banks were on the mend, boosted hopes that the worst of the euro zone crisis was over, driving the euro up more than 2 percent so far this year. The single currency also appreciated as European stocks traded at almost a two-year high on increased optimism that financial turmoil in the region is easing.
GBP- Sterling is up against the US dollar after profit-taking gave the British currency some respite from a sell-off. However, concerns about a weak UK economy, prospects of more monetary easing and a possible rating downgrade means it will struggle to break clear of recent lows. Any rise in the pound could run out of steam given data that showed Britain risked a 'triple-dip' recession and on speculation that incoming Bank of England governor Mark Carney, who takes up his post later this year, may take more aggressive measures to boost growth. Carney - who currently heads the Bank of Canada- said monetary policy was not "maxed out" in any major economy, and raised the prospect of allowing more time for inflation to fall back to target when growth was weak. Also heavily weighing on sterling are mounting expectations of a downgrade to the UK's prized triple-A credit rating as finance minister George Osborne falls behind on debt targets that low growth rates have made far harder to hit.
JPY- The Japanese yen is higher against the US dollar for the second day as market talks of large option maturities in the coming days that may temporarily curtail USD/JPY, however yen weakness remains solid. The currency has slumped 11 percent against the dollar since early November as Abe stormed to an election victory with bold promises to end decades of stop-start growth. After the BOJ's overhaul of its policy this week, Shirakawa offered a note of caution, saying it was important that the central bank remain flexible in guiding policy in the future.
Commodity Currencies -The Antipodean currencies are higher against the US dollar and shot up near four-year peaks versus the yen as a jump in business confidence in Australia and a surprising trade surplus underpinned both currencies. The catalyst for the broad Aussie move higher was a sharp bounce in Australian business confidence in December, thanks in part to lower interest rates and better news offshore. The New Zealand dollar edged up from a one-month low hit overnight after data showed an unexpected trade surplus for December. The more upbeat economic data should eventually have positive implications for the kiwi dollar. The Reserve Bank of New Zealand is expected to stay pat on Thursday, with markets and analysts expecting no change in record low key rate at 2.5 pct. The Canadian dollar bounced up slightly against the US dollar, although trade was subdued ahead of major North American economic data later in the week. The Canadian currency appears to have settled into a fresh range between C$1.01 and par value to the U.S. dollar after weakening sharply last week on a shift in Canada's monetary policy outlook. In recent weeks, it has disconnected from the tight correlation with commodity prices and equity markets.
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