US dollar supported on prospects of Fed scaling back stimulus
Sterling slides vs USD on Fed announcement
Antipodean currencies take a break from slide against USD
USD – The US dollar moved away from a two-week high against a basket of major currencies. However, it is still likely to clock its best weekly gains in a year on expectations of an eventual end to ultra-loose U.S. monetary policy. The greenback surged and assets like stocks and bonds fell after Fed Chairman Ben Bernanke said on Wednesday the economy was improving enough for the central bank to begin scaling back its monthly $85 billion in asset purchases. The statements prompted market participants to start pricing in an interest-rate hike in late 2014. Any speculation of an end to the Fed’s ultra-loose monetary policy will help support the dollar in the short term.
EUR – The euro fell to a two-week low against the US dollar as interest rate differentials moved in favor of the greenback and on a re-emergence of Greece's political turmoil that is keeping investors on edge. Greece's Democratic Left party may pull out of Greece's ruling coalition after talks to resume state television broadcasts collapsed, plunging the nation into fresh turmoil. The news sent the country's borrowing costs to their highest levels since April. Also, a rise in bond yields in southern European countries, given a global bond market sell-off, is compounding the euro zone's problems. A worsening of the situation could trigger a slide in the single currency.
GBP – Sterling weakened against the US dollar, giving back some of its earlier gains posted this week. The pound had been supported by data suggesting the UK economy is recovering and more monetary easing may not be necessary. However, any gains against the US dollar could be short-lived after this week's clear signal from the U.S. Federal Reserve that it was ready to begin winding down its money-printing program. There are also residual concerns remaining that Mark Carney, who takes over as Bank of England governor next month, may be inclined to ease policy, especially if UK data worsens.
JPY – The Japanese yen weakened against the US dollar hitting a low of 98.13. The move came after BoJ Governor Kuroda stressed that financial markets will stabilize over time which will help improve Japan’s economy. He stated that Japan’s economy will likely resume a moderate recovery as overseas growth expands and domestic demand remains resilient benefiting from the effect of monetary easing and aggressive stimulus measures. Analysts believe that with the Fed likely to start tapering QE later this year, this will encourage dollar/yen growth.
Commodity Currencies – Commodity currencies are mixed against the US dollar as gold prices rebounded and the price of oil continued its decline. Meanwhile, the Canadian dollar reached its weakest level against USD since December 2011 after May inflation data came in below expectations, leading many analysts to conclude that an interest rate hike is not in the near horizon. The Australian and New Zealand dollars found a brief breather from selling with speculators seemingly satisfied for the moment, but the Aussie is still headed for its worst week in more than a year.
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