The greenback rose against major currencies on Wednesday amid signs that financial market turmoil was starting to threaten economic growth in other developed countries. The Fed auctioned $20 billion in loans at an interest rate of 4.65 percent, less than the 4.75 percent the U.S. central bank charges financial institutions to borrow directly at its discount window
The single currency started to decline against the dollar after the release of German business confidence. The Ifo index dropped to 103.0 (forecast was 103.8), the lowest in almost two years. The European Central Bank President Jean-Claude Trichet said the 13 countries that use the euro face a ‘more protracted period’ of inflation that will prevent a cut in borrowing costs from 4 percent in 2008. Trichet said ECB will do whatever is necessary to deliver price stability in the medium term and is alert. He reiterated that the primary goal of ECB is price stability. Euro fell to one-month low of 1.4325 before rebounding.
Japan's currency strengthened initially to 112.74 per the dollar as the credit outlooks of MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, were lowered to negative by Standard & Poor's. However, the pair rebounded to 113.50 in New York on dollar’s broad-based strength against other major currencies and ahead of interest rates decision by Bank of Japan on Thursday. The Bank of Japan is forecast to keep its target lending rate at 0.5%.
The British pound fell broadly after minutes of the Bank of England's December meeting showed policy makers voted 9-0 to reduce interest rates, increasing speculation that the BOE may cut interest rates again next year. Cable tumbled from 2.0196 to 1.9928, below 2.0000 for the first time in three months.
Morgan Stanley reported a steeper-than-forecast loss after the writedowns on mortgage-related holdings and received a $5 billion cash injection from state-controlled China Investment Corp., which will acquire as much as 9.9% of the firm.
Federal Reserve Bank of Richmond President Jeffrey Lacker said that rising inflation expectations were a concern, but their increase so far was not undermining the U.S. central bank's credibility. The Boston Federal Reserve Bank said five banks in the New England region will announce a $125 million fund on Thursday to help subprime borrowers.
Swiss National Bank Chairman Jean-Pierre Roth said the Swiss franc is undervalued against the euro and its continued weakness could push inflation higher and trigger more interest rates rises. He added that the franc's exchanged rate is not itself a target of SNB policy but does play an important role in the bank's inflation forecast. The greenback retreated against Swiss franc after rising from 1.1512 to 1.1587.
Thursday will see the release of Japan’s trade balance, German Gfk index, U.K. current account and GDP, U.S. GDP, jobless claims, personal consumption, leading indicators and Philadelphia Fed survey.