Dollar dropped against the single currency on Wednesday after the Federal Reserve said economic activity is 'leveling out', suggesting the U.S. economy has passed the worst of recession. The Fed also left its Federal funds rate unchanged at 0-0.25% as widely expected and signaled no interest rate increases were likely until at least next year as the Fed did not see inflation as a problem. Conditions in financial markets have improved further in recent weeks and household spending has continued to show signs of stabilising but remains constrained by ongoing job losses, sluggish income growth, lower house prices and tight credit, the Fed stated. The long-term U.S. treasury debt purchase program will be extended to the end of October with the total amount remaining at $300 billion.
Euro hit an intra-day high of 1.4248 against the dollar after hawkish comments from the European Central Bank Executive Board member Juergen Stark. Stark said that the eurozone could return to economic growth earlier than previously estimated and he saw signs of stabilisation in economic activity. The current interest rates are appropriate and the danger of deflation in the eurozone is very minimal, Stark added. Eurozone industrial production decreased by 0.6% m/m and 17.0% y/y versus the expectation of a 0.3% rise and fall of 16.0% respectively. Although euro fell sharply to around 1.4120/25 right after the release of Fed statement, price rebounded strongly from there but the pair failed to penetrate 1.4248.
The British pound swung between gains and losses against the dollar on Wednesday. Earlier in the day, the pound hit a two-week low of 1.6391 versus the dollar ahead of the Bank of England's forecast that inflation would remain well below its 2.0% target, signaling clearly that monetary policy is unlikely to be tightened any time soon. The BoE predicted that Britain’s worst recession in decades would end early next year but GDP would take time to return to pre-crisis levels. The U.K ILO unemployment rate rose to a 13-year high of 7.8% in June from 7.6% in the previous month. Sterling rebounded in late London trade in line with the broad-based weakness in dollar before the FOMC announcement. Despite cable’s brief but sharp retreat to 1.6427/30 after the Fed’s statement, buying interest on dips lifted the pair before another retreat was seen in late New York session.
Earlier in the day, the dollar tumbled to as low as 95.12 against the Japanese yen, however, the greenback rallied to an intra-day high of 96.80 in New York afternoon before retreating on long-liquidation. The Japanese yen also weakened versus higher-yielding currencies as the Fed will only extend the duration but not the dollar amount of a program to buy long-term government securities, giving a positive outlook on the economy and reducing demand for the yen as a safe-haven asset. Eur/jpy strengthened from 134.10 to 137.29, gbp/jpy rose from 156.01 to 159.73 and aud/jpy rallied from 77.91 to 80.56.
Data to be released on Thursday include German GDP, Switzerland PPI, eurozone GDP, U.S. import and export price index, jobless claims, retail sales.