The U.S. Dollar plunged to a new low for the year as global investors aggressively bought higher risk assets such as equities and commodities. The fact that this buying took place one day ahead of the Fed's FOMC meeting indicates that traders have confidence that the Fed is going to leave interest rates at historically low levels for some time.
The EUR USD posted a strong gain for the day and closed near the high for the year. Euro traders are speculating that the U.S. Fed is going to leave interest rates low relative to the European Central Bank's benchmark rate. Traders seeking higher yields are taking advantage of this interest rate differential.
GBP USD investors ignored the weak U.K. economy and the possibility of a new financial crisis and drove the British Pound higher. Technically oversold conditions also contributed to the buying spree. The main trend is down and most traders feel this market will have to build a new support base in order to support a strong rally. Otherwise, the weak fundamentals indicate that this rally may be short-covering.
Stronger crude oil and equity markets helped drive the USD CAD lower. Aggressive traders seeking higher yields on risky commodities such as oil, precious metals and industrial metals helped drive the Canadian Dollar higher. This is because these markets make a major contribution to the Canadian economy.
Traders seeking higher yields were encouraged to buy the Japanese Yen over the U.S. Dollar on Tuesday. Continue to look for the USD JPY to weaken as long as U.S. interest rates remain the lowest in the world. Several weeks ago the U.S. replaced the Yen as the world's funding currency. This trend will not reverse until U.S. rates rise.
Strong demand for higher yields helped boost the New Zealand and Australian Dollars. Talk that improved economic conditions may trigger a rate hike by the Reserve Bank of Australia before the end of the year was also deemed supportive. An improving economy may cause the New Zealand central bank to scrap its plans to keep interest rates low into 2010.
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