The Dollar rose strongly against Euro and Yen on Monday, buoyed by a planned US stimulus package and increased expectations of interest rate cuts by European and British central banks.
Investors welcomed news that US President-elect Barack Obama is seeking as much as $310 billion in tax cuts as part of a proposed stimulus package that could be worth up to $775 billion.
The yen fell to 4-week lows against Dollar amid improved risk appetite, with bargain prices and hopes for a global economic recovery this year prompting stock market gains in Europe and Japan. Euro hit 3-week lows against Dollar with weaker-than-expected inflation data in Euro-zone and tax cuts in Germany seen raising pressure on the European Central Bank to cut interest rates further. Analysts said the Euro's rally in December was too far, too fast given the weak state of the euro zone economy.
Sharp Euro losses have also helped Sterling recover some of its recent losses against the euro zone currency. Last week, EurGbp hit record high and appeared to be headed for parity.
Yesterday, EurUsd dropped 2.3% to 1.3638 after hitting 1.3547, its lowest since mid-December. UsdJpy rose 1.26% to 93.24, its highest since December 8th. GbpUsd rose 1.3% to 1.4717 from earlier 1.4428 low. EurGbp fell sharply by 3.55% to 0.9268. UsdChf jumped 3.49% higher at 1.1085.
Also, Euro weakened after ECB Vice President Lucas Papademos said on Sunday that more rate cuts may be needed to shield the Euro-zone economy from recession. Monday Consumer price numbers add pressure on the ECB to cut rates further when it meets next week to decide on monetary policy in the currency bloc. Markets have largely priced in a 50bp rate cut to 2%. Investors also see the probability of borrowing costs falling more sharply to 1.75%.