The major loss of yield support will battle with investment inflows in the short term which will maintain volatile trading conditions.
Following the latest FOMC meeting, the Federal Reserve cut interest rates by a further 0.50% to 3.00% with the discount rates also reduced by 0.50%. The Fed stated that there were downside risks to the economy while credit conditions had tightened and that the housing correction had deepened. The Fed also cited evidence of a weaker labour market for the further reduction in rates. There was a 9-1 vote with Fisher calling for no change. Following the cut, the dollar weakened to lows beyond 1.49 before correcting in choppy trading.
The advance fourth-quarter GDP report recorded a sharp slowdown in growth to an annualised 0.6% for the fourth quarter from 4.9% previously. The ADP employment report was more positive as it recorded an increase in jobs of 130,000 for January after a revised 37,000 increase the previous month which should help ease immediate fears over the labour market despite the Fed comments.
The dollar will, however, remain vulnerable on yield grounds in the short term, especially as the generally downbeat Fed assessment will maintain expectations of further cuts which will make it more difficult for the dollar to find a floor. The prospect for investment inflows should alleviate the pressure to some extent with direct investment flows continuing.