[B]Talking Points[/B]
• Japanese Yen: BOJ Stays Pat as expected
• Euro: New highs ahead of Fed Retail Sales help
• Pound: takes out the 2.07 figure
• US Dollar: FOMC on tap
The dollar reached new lows in early European trade today, with EURUSD hitting 1.4468 while GBPUSD broke above the 2.0700 level as traders continued to sell the greenback ahead of the FOMC rate announcement at 14:15 GMT. The market widely expects the Fed to lower rates by 25bp to 4.50% but given yesterday worse than expected consumer confidence figures, most participants now believe that the Fed will be forced to lower rates once again at the December FOMC meeting.
Should that happen, the buck’s interest rate differential against the euro will shrink to only 25bp while the pound will then command a l50bp premium in rates. In short, the pressure on the dollar appears relentless and only a stronger than forecast NFP report this Friday could possibly pull it out of its current tailspin. Today’s ADP data may provide some forward guidance as to the NFP results, but if –like most recent US data – it points to more weakness, the greenback could come under a fresh assault in the New York session.
Ultimately, today’s direction is likely to be set by the Fed. The US policy makers find themselves in terrible quandary as they try to address the rapid deceleration in US demand while at the same time avoiding further decline in the dollar. Traders will parse the Fed communiqué for any clues to future action, but given the change of sentiment in the market over the past several weeks, the Fed’s words may be obsolete almost as soon as they are released. US monetary authorities are now hostage to the latest economic news and should the data show further deterioration Dr. Bernanke will be forced to again loosen monetary policy come December regardless of what they state today.
The one major that continues to lose ground against the dollar is the yen. As expected the BOJ kept rates unchanged as governor Fukui noted that downside risks with regard to global growth and financial markets continue to persist. He also suggested that global yields have come under downward pressure providing another reason why Japan cannot adjust interest rates higher. Most market players now speculate that Japanese rates may remain at these ultra low levels for the remainder of Mr Fukui"s term which ends on March 21. Should that occur the yen will continue to remain the preferred funding currency for the carry trade and will weaken any time equity markets prove supportive of risk.
