The dollar surprisingly inclined in early Asia trading today after it rebounded sharply overnight in response to a joint effort by global central banks to pump 200 billion dollars to ease the current credit crisis. The Fed acting inline with the European central bank and the Bank of Canada and the Swiss National Bank agreed to loan investment banks money in change for slumping mortgage backed securities.
Despite the staggering sums being offered by the Fed over the past week, some analysts warned that the new measurements of new money pumped might not even be enough to fill the holes of losses on ill mortgages during the housing bubble.
The euro on the other hand, reversed its decline after the initial wave of dollar buying recording at this hour a high of 1.5389 and a low of 1.5337. This was caused with remarks by Mr. Trichet and the ECB warning about inflation risks and suggesting the problem that the market is currently facing is a weak dollar not a strong euro which definitely benefits the European currency.
To elaborate more, the crushing theme in the currency market remains pointing to a dollar weakness particularly after the Feds prepares to lower interest rates in the hope of picking up the US from a recession. In Europe on the hand is holding on the target of keeping inflation in check and this difference in exchange rates at this time benefits the euro pushing it to soar high.
Meanwhile, given rapid gains in food and energy prices, there is well supported global inflation which in turn increases the pressure on the Bank of England which already faces a mounting downside risks to growth. However, the combination of an everlasting weak dollar and the certainty that the Feds will cut in rates in oppose to the BOE which left rates unchanged at 5.25% on march 6 is pushing pound ahead of the dollar thus allowing the GBP/USD pair to surge and at this hour the pair is trading towards the upside to fetch a high of 2.0136 and a low of 2.0110
As for the yen which dropped against the dollar yesterday, had a reverse reaction today climbing back as Japanese government report showed that the GDP expanded 3.5% in the fourth quarter. A boost was also given to the yen following unwinding of carry trades. The pair was thus pushed to the downside to record at this hour a low of 102.82 after recording a high of 103.33.
There is no doubt that such arrangements and measurements by the Feds may ease worries about the credit crunch crisis but just for now, as the market will remain focused on the credit market until private financial institutions complete their write-offs of bad debts which unfortunately will take some time.
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