Uncertainties regarding the outcome of the Treasury’s rescue plan for the U.S. financial markets have clearly pressed on the greenback as market participants weigh the repercussion effects of the bailout proposed last week.
[B][U]Talking Points[/U]
• Japanese Yen: Breaks Below 106.25
• Pound: BoE Bulletin Says Sterling to Depreciate Further
• Euro: Strengthens to 1.46
• US Dollar: Weakens Across the Board
[U]Euro, Pound And Yen Drop As U.S. Plans To Create Entity To Purchase Troubled Assets[/U][/B]
Uncertainties regarding the outcome of the Treasury’s rescue plan for the U.S. financial markets have clearly pressed on the greenback as market participants weigh the repercussion effects of the bailout proposed last week. The arrangements established by U.S. Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke would help to restore confidence in the financial markets, but may come at a great cost as the government would need to raise their debt ceiling to $11.315 trillion.
Furthermore, traders have already raised a bearish outlook for the greenback, which led the euro to rally for the fourth consecutive session to break above 1.4550. Meanwhile, ECB Board member Juergen Stark supported the central bank’s neutral policy stance as he stated that lowering the benchmark interest rate would not ‘solve problems in the financial markets.’ He went on to say that the ECB’s will remain focused on their sole mandate to ensure price stability for the Euro-Zone, but noted that economic activity in Germany may remain subdued throughout the third quarter as the ‘shock waves’ from the U.S. continues to take a toll on the global economy.
The British pound also gained as the U.S. dollar lost ground against most of the major currencies, and led the Sterling to
rally above 1.8425 during the overnight session. However, U.K. Chancellor Darling stated that ‘at this time when the economy is slowing down, I don’t think there is anybody who is saying that this is the right time to take a lot of money out of the economy.’ The statement reiterated Prime Minister Brown’s comments which stated that supporting borrowing activity is the best option for the government to help the U.K. economy to recover. However, the BoE quarterly bulletin stated that the central bank expects the downturn in the global economy to worsen, and reported that ‘market contacts generally thought sterling was more likely to depreciate further than appreciate.’ The bulletin went on to say that the BoE expects the ongoing credit crunch in the U.K. to continue until 2010.
The bare economic calendar for the U.S. will leave price action at the mercy of broader economic winds and any new developments following the rescue plan for the financial market. If Congress decides to ratify the new initiatives this week, the move could spark bullish sentiment for the U.S. dollar. However, if Congress fails to act before they break at the end of this month, mounting selling pressures could lead the greenback to weaken significantly going forward.
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