The underlying dollar fundamentals remain extremely weak. It will still gain some important near-term protection from the lack of attractive alternatives
The dollar weakened back to lows beyond the 1.30 level in New York on Tuesday with hopes that there would be positive US developments. As policy action dominated, the economic data did not have a significant impact. Risk appetite was initially supported by the Senate’s approval of a fiscal stimulus plan, although it differs significantly from the House version and a compromise version will be required.
US Treasury Secretary Geithner announced the new Financial Stability Plan to support the US banking and wider financial sector. There will be further support of the banks through asset purchases while the Treasury will look to boost consumer credit. There was a lack of specific details which unsettled Wall Street and pushed the Dow Jones index down sharply with markets also uneasy over the plans for direct lending with potential support of over US$1.5trn.
As risk appetite faded, the familiar currency-market trading pattern emerged. The strengthened to around 1.29 before losing some ground on Wednesday