The Dollar was little changed on Monday as more banking sector stress added to worries about the US economy, overshadowing a Group of Seven warning on the threat sharp exchange rate moves pose to financial stability.
A surprise first-quarter loss at Wachovia Corp, the fourth-largest US bank, suggested more credit market turmoil ahead, prompting traders to sell Dollars, mostly against the Euro and Sterling. That helped wipe out Dollar gains seen after finance officials from the G7 developed countries on Friday expressed concern about sharp currency fluctuations.
The Dollar had rallied briefly overnight on the view that G7 countries may start buying the Dollar to slow its decline. But, on Monday, investors were betting the G7 would not take action soon, especially with the Federal Reserve likely to cut interest rates further to support a US economy that may be already be in recession.
Yesterday, EurUsd was trading at 1.5823, near its closing level on Friday. It fell as low as 1.5671 after the G7 statement but also traded up to 1.5886, not far from last week all-time high 1.5913. GbpUsd rose 0.12% to 1.9728 after trading as high of 1.9894 intraday. UsdJpy was down 0.18% to 101.13 after earlier falling to 100.31 following news of Wachovia's losses.
The Fed has cut the benchmark interest rate by 300 basis points at 2.25% since credit turmoil began in late August and is likely to reduce it again when it meets later this month. The European Central Bank, meanwhile, has held rates at 4% for more than a year, and comments from policy-makers on Monday clearly indicated the bank's lack of interest in cutting rates, adding additional support to the Euro. ECB Governing Council member Yves Mersch said Monday there is no room for rate cuts this year. Any official attempt to weaken the Euro and boost the Dollar would run up against the respective monetary policies of the two central banks, limiting the impact of intervention.
In addition to Wachovia, Merrill Lynch & Co Inc and Citigroup Inc are due to report first-quarter results later in the week, and analysts say both banks may announce billions of dollars in write-downs.
Analysts said that FX market participant are likely to push the Euro to a new record peak over 1.6000, particularly ahead of the Fed's April 29 meeting.