The Dollar extended its decline after the release of minutes from the Aug. 7 Federal Reserve policy meeting showing the US central bank acknowledging a policy response may be necessary if financial market conditions worsen.
Fed members expected a return to more normal conditions, but recognized the process will likely take some time, particularly in relation to sub-prime mortgages.
Volatility in financial markets has fueled speculation the Federal Reserve may cut its benchmark interest rate, after it reduced the discount rate at which banks borrow directly from the Fed by 50 basis points to 5.75 percent earlier this month. Given such speculation, investors are awaiting a speech on “Housing and Monetary Policy” by Fed Chairman Ben Bernanke on Friday that could offer some indications of the future path of Fed policy.
News and Events:
The Yen rallied against the Dollar and Euro on Tuesday as investors, fearing tougher credit conditions will crimp global economic growth, bought the lower-yielding currency and sold riskier assets. The Dollar extended its decline after the release of minutes from the Aug. 7 Federal Reserve policy meeting showing the US central bank acknowledging a policy response may be necessary if financial market conditions worsen.
Fed members expected a return to more normal conditions, but recognized the process will likely take some time, particularly in relation to sub-prime mortgages.
“The headline worth highlighting is the one in which they say the Fed may act if financial markets conditions worsen,” said analyst.
The UsdJpy traded down 1.4% at 113.98, but was still off its 14-month low 111.60 Yen set in mid-August. The Euro slipped 1.85% against the Yen to 154.74.
Euro slipped 0.44% to 1.3578 from the previous session. UsdChf closed nearly unchanged at 1.2026 and earlier touched a two-week low of 1.1962. The EurChf fell 0.4% to 1.6328.
The Yen was already up prior to the release of the minutes as risk averse investors juggled portfolios.
Overnight, a report from Britain’s Times newspaper that State Street Corp has $22 billion in exposure to the same kind of credit-related products that have inflicted other funds damages in recent weeks. State Street said in a statement that its commercial paper continues to be sold daily. British bank Barclays denied a Financial Times report on Tuesday that it has several hundred million dollars of exposure to failed debt vehicles structured by its investment banking arm.
A report showing US home prices fell the most year-on-year in the second quarter to the worst decline in at least 20 years gave dealers a second reason to exit carry trades, in which investors borrow in low-yield currencies like the Yen and invest in higher-yielding assets.
The New Zealand dollar, which has the highest yield in the industrialized world, was down 3.16% to 0.6918 against Dollar. Against the Yen, the kiwi at current prices is flirting with the largest monthly decline since October 1987, down 4.47% to 78.8450. Even if the yen loses some strength, it could still be the largest monthly decline in the kiwi against the yen since October 1998.
Volatility in financial markets has fueled speculation the Federal Reserve may cut its benchmark interest rate, after it reduced the discount rate at which banks borrow directly from the Fed by 50 basis points to 5.75 percent earlier this month. Given such speculation, investors are awaiting a speech on “Housing and Monetary Policy” by Fed Chairman Ben Bernanke on Friday that could offer some indications of the future path of Fed policy. Expectations are fading for the European Central Bank to raise interest rates at its meeting next week.
Today’s Key Issues (time in GMT):
09.30 CHF August KOF Indicator 2.13 vs 2.13
11.00 US MBA Purchase Index previously 441.5
11.00 US MBA Purchase Change previously -5%
11.00 US Mortgage Market Index previously 641.1
11.00 US Mortgage Market Change previously -5.5%
23.50 JPN July Retail sales -0.8% vs -0.4%
The Risk Today:
EurUsd went near 1.3687 resistance before correcting down to 1.3575. Nearby support cut in at 1.3552, August 24 low, ahead of 1.3449 low from August 22nd. A move below this would be necessary to threaten the current uptrend, and confirmation of trend end under 1.3360. On the upside, a break toward 1.3687 will pave the way for extended gains to 1.3858 key resistance.
GbpUsd has failed to confirm a clear break of Trendline resistance 2.0195. A break there is required to trigger gains towards 2.0272 and 2.0395 resistances. On the downside and further to recent development, market looks for a decline towards 1.9916, august 23rd low and potentially 1.9653 key level from August 17th.
UsdJpy The downtrend remains intact below 117.13. Renewed weakness may break toward 113.67 support down to 111.60 ,August 17th low, and may open the way to 110.30 (61.8% retracement). On the uptrend, resistance holds 117.13 last week high, before 118.93 (former 23.6% retracement). Trendline resistance (former downtrend channel) might slow the break up on 116.61.
UsdChf is consolidating after having hit 1.2216 and 1.1819 August high and low. On the uptrend, 1.2044 is holding initial resistance before 1.2183 (38.2% retracement of 1.2771 to 1.1819 decline). Initial support holds 1.1994 Friday low. There is very light support till 1.1819. A break down might open the way toward 1.1529 (61.8% projection).
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Resistance and Support:
By Jean-Claude Braha - ACM Advanced Currency Markets, Geneva, Switzerland