Fears over the US economy and huge financing burden will make it difficult for the dollar to sustain advances against major currencies.
The Euro was unable to advance in early Europe on Tuesday and then weakened sharply for the second successive day with lows close to the 1.33 level.
The US ISM index for the services sector was slightly stronger than expected with a rise to 40.6 in December from 37.3 the previous month and in contrast to expectations of a further small decline, although there will be some fears that it reflected seasonal factors rather any underlying improvement. Elsewhere, pending home sales fell 4.0% in November after a revised 4.2% decline the previous month which reinforced fears over the housing sector.
The FOMC minutes from December’s policy meeting were notably downbeat. Members saw substantial downside risks to the economy with GDP set to contract for 2009 while some favoured quantitative reserve requirements and saw a risk of uncomfortably low inflation. The minutes will reinforce expectations of a highly expansionary Fed policy this year.
An important focus will continue to be on the prospects for a further aggressive fiscal package by the incoming administration. The potential for substantial tax cuts and spending boost will maintain some optimism that the economy can be revived. There will, however, also be serious concerns over the financing implications and the risk of an exodus from Treasury bonds which could also trigger substantial pressure on the dollar.
The US currency weakened back to around the 1.35 region against the Euro following Fed minutes with further losses to 1.36 on Wednesday.