The Federal Reserve Open Market Committee starts its two-day meeting on Tuesday as sentiment towards the dollar continues to weigh on its performance. Investors are starting to wonder whether the economy is already showing signs of rolling over even as the central bank works towards adding the final touches to its second phase of quantitative easing. Some investors are starting to wonder what an ex-stimulus economy will look like and fast-concluding that the dollar is doomed to an era of permanently low interest rates.
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U.S. Dollar – For the first time the Fed will host a press conference after it concludes its April meeting tomorrow. The media will have its first opportunity to drill Chairman Bernanke on where he thinks the economy is heading after he delivers his prepared remarks. Data due for release on Tuesday is likely to showcase the ongoing albeit gradual decline in the housing market in the form of the Case-Shiller/S&P index, with nationwide metropolitan home values predicted to be down 3.3% from a year ago. The dollar index has fared badly during the past week continuing its painful erosion. On Tuesday the index eased by 0.2% to 73.82 leaving it close to its weakest since August 2008. Later in the week data for Q1 GDP is scheduled to depict a slowing in the pace of expansion, which has investors alarmed at a time when the central bank is busy buying government bonds through the open market.
Euro – The euro once again took up the running taking advantage of the lame dollar and spurred on by an interview with Jean-Claude Trichet in a Finnish journal. The head of the European Central Bank remained open to further monetary tightening in order to nip nascent inflationary pressures in the bud. Mr. Trichet warned that there were signs of second-round inflation effects ‘here and there,’ which accounts for his willingness to distinguish between non-conventional bond-purchase policies and traditional monetary policies designed specifically to combat inflation. The single currency again rallied to $1.4650 to match last week’s highest price against the dollar since December 2009.
Canadian dollar – The influence of U.S. demand on the fortunes of its neighboring economy is restraining the performance of the so-called loonie despite improving risk appetite elsewhere. Crude oil futures for June delivery are trading at $112.00 per barrel while the price of gold has come off another record-high, yet neither event is providing the fillip for the domestic currency that might be expected. The loonie currently buys $1.0466 U.S. cents and compares to last week’s four-year high when it stretched to $1.0545.
Aussie dollar – The Aussie dollar has fared better and rebounded from a session low at $1.0680 to trade back up to $1.0755. An earlier Conference Board reading for February’s leading index managed a marginal advance to 64.5 from 63.4. The index is compiled using latest available data at the time to predict six months in advance to gauge prospects for the economy using latest economic trends. The Aussie also advanced versus the Japanese yen to buy ¥87.86.
Japanese yen – An all-around recent drubbing of the dollar has favored the Japanese unit although it’s highly unlikely that the authorities will welcome the onus of a stronger currency following the dislocation of the economy in the aftermath of the tsunami and earthquake. Coordinated intervention following those events five weeks ago coerced the yen to weaken from below ¥80.00 to above ¥85.00. Today the yen has once again strengthened to ¥81.72 and a break of ¥81.62 is likely to raise the specter of further coordinated intervention to dull its rise. However, the rising yen currently smacks of dollar weakness rather than growing risk aversion, which might automatically raise tensions among central bankers on the rationale for intervening further at least on grounds of yen volatility.
British pound – Risk appetite may be growing and the dollar maybe broadly weaker but neither event is raising the likelihood that the Bank of England will have to tighten monetary policy anytime soon. The pound has recently run up to $1.6600 against the greenback although is slumping in mid-morning New York trade back towards its session low at $1.6450. A CBI Trends survey showed order books had weakened for April with the net balance of respondents fell to minus-11 after a reading of plus-five last time around.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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