The Dollar rose at a 3-week high against Euro at 1.3313 yesterday, helped by persistent signs of economic weakness in the euro-zone that may force ECB to slash interest rates further. It also continued to benefit from a planned US stimulus package, with investors betting this would help the US economy recover from its recession sooner than other industrialized countries.
Minutes from the Federal Reserve's last policy meeting suggested the Central bank is concerned that downside risks remain even with the global positive sentiment early this week. Federal Reserve wanted to send a clear message that they intended to keep interest rates very low for a long time to help the economy recover from a recession.
The Euro fell broadly after a drop in euro-zone inflation boosted expectations the European Central Bank will continue to cut interest rates, which would likely reduce the appeal of Euro against Dollar. The ECB is expected to cut rate by 50bp or more at its policy meeting next week. ECB officials have suggested that rates could come down more in the future. With ECB targets inflation at just below 2%, many intervenient think that level keeps the door open to more aggressive rate cuts from the current 2.5% to economy recovery.
Yesterday, EurUsd dropped 0.97% to 1.3506 having hit 1.3313 intraday low, its weakest since December 12. UsdJpy rose 0.16% to 93.39 after hitting 94.64 intraday high. EurJpy lost 0.79% to 126.14. GbpUsd rose 1.32% to 1.4911 reversing from earlier 1.4504 low. UsdChf rose 1.46% to 1.1247 after having hit 1.1077 low. EurGbp dropped 2.27% to 0.9058 from 0.9299 intraday high.
US data on Tuesday showed a drop in factory orders and pending home sales.
Traders await policy meeting by the Bank of England, which is expected to cut interest rates to help recovery in current deep recession. BoE will start a 2-day monetary policy meeting later today and investors see the possibility of a 50bp rate cut from current 2%, even with a chance of a bigger rate cut may be schedule.