The Japanese yen fell against the dollar and euro as U.S. stocks rallied on speculation Federal Reserve cuts in interest rates may prevent a recession. The greenback fell initially versus the yen to 104.95 before rebounding strongly to close above 106.75 due to the late rally in U.S. stocks. Euro recovered most of the losses against the Japanese yen unit and rebounded strongly from 152.79 to close above 156.00.
The Dow Jones industrial average ended up 299 points or 2.50% at 12270. The Standard & Poor’s 500 index gained 28.10 points or 2.14% at 1338.60. The Nasdaq Composite Index jumped 24.14 points or 1.05% at 2316.41.
U.K. fourth-quarter GDP comes in above forecasts at 0.6% and 2.9% q/q n y/y respectively, while the vote outcome for the MPC January meeting was 8-1 in favour of steady rates (economists had been expecting 2 members to have voted for a rate cut, but only Blanchflower did so). The British pound fell briefly from 1.9646 to 1.9465 before rebounding to around 1.9595 on renewed cross buying in sterling due to the late rally in U.S. stocks. Sterling recovered most of the losses versus the Japanese yen and rebounded strongly from 206.49 to 209.09.
Former U.S. Treasury Secretary Robert Rubin said the U.S. economy faces significant risk in the short term. He said there is a risk that lower rates can 'heighten' softness of U.S. dollar.
Treasury Under Secretary for International Affairs David McCormick said there has been an enormous amount of cooperation that has taken place within the context of near-term policy decisions. He also said Treasury Secretary Henry Paulson and the Fed have extensive contact with their counterparts among the Group of Seven economic powers and elsewhere on short-term policies.
New Zealand's central bank left interest rates unchanged at 8.25 percent as expected. The New Zealand dollar and Australian dollar rose from 0.7548 to 0.7692 and from 0.8610 to 0.8749 respectively on active cross buying especially versus the Japanese yen.
Thursday will see the release of Japan’s all industry index and trade balance, German Ifo index, U.S. jobless claims and existing home sales.