Optimism spread in the market after major central banks announced coordinated actions to enhance their capacity in order to provide liquidity support to the global financial system, which in result reflected negative demand for the low yielding U.S. dollar and spread gains across the board.
The U.S. dollar index (USDIX) declined sharply, reaching a low of 78.11, after opening the session at 79.07. The index set the highest at 79.37 before the news and is currently trading around 78.19
The European Central Bank (ECB), the Federal Reserve, the Bank of Canada, the Swiss National Bank (SNB), the Bank of England (BoE) and the Bank of Japan (BoJ) decided to cut rate on the existing temporary U.S. dollar liquidity swap agreements by 50 bp, where the new rate will be the U.S. dollar Overnight Index Swap (OIS) rate plus 50 bp. The new rate will be applied on all operations conducted from December 05 and the swap agreements will be extended to February 2013.
Global monetary makers also established temporary bilateral liquidity swap agreements, which will provide liquidity in each jurisdiction in any of their currencies according to market conditions. The central banks see that market conditions do not need to offer liquidity in non-domestic currencies other than the U.S. dollar but in case the central bank judged that it was still prudent to put the necessary arrangements so that liquidity will be put provided timely inline with market needs.
The ECB, SNB, BoE and the BoJ also decided to continue offering 3-month tenders until further notice.
The sudden decision from Central Banks shocked markets and sent the U.S. dollar to the downside, as investors weighed the decision positively, where this decision should assure that shortage of liquidity in any currency will not be seen and now this credit easing could support the financial markets to rebound on more stable outlook, which eased market tensions and volatility.
The euro appreciated against the U.S. dollar after the news despite the downbeat unemployment rate seen earlier during the session, which showed that unemployment unexpectedly climbed to 10.3% from the previous of 10.2%.
The EUR/USD pair started the day at 1.3315, and reached a low of 1.3259 after unemployment surged; however, the pair returned to trade positively after central banks provided more liquidity to the market, which in result sent the pair to a high of 1.3503. The pair is trading now around 1.3466.
The Canadian dollar also gained strength against the U.S. dollar, and extended the gains after the gross domestic product quarterly index showed that Canada unexpectedly grew by 3.5% from the previous drop of 0.4%.
The USD/CAD pair opened the session at 1.0317, and set the highest at 1.0362 and the lowest at 1.0150, and is currently hovering around 1.0154.
The high yielding Australian dollar gained big time against the U.S. dollar as optimism spread in the market and investors' appetite for risk improved, where after the opening of 0.9999, the AUD/USD pair reached a high of 1.0329 and a low of 0.9940, and is trading now around 1.0270.