The dollar fell across the board as the Federal Reserve begins a two-day meeting – the outcome of which, few investors expect to learn much. Several analysts have ruled out a third wave of quantitative easing given that wave two will be over by the time the FOMC meets again. Some onlookers claim that the hard work has been done by policymakers already and that on account of the fact that the engine is now running behind the economy, all that more bond purchases can achieve is to fuel a further round of inflation through rising commodity prices. Should the Fed push too hard they will find themselves having to tighten short rates in response to a further round of fuel and food price increases.
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Euro – Luxembourg’s Jean-Claude Juncker reiterated his mission of denying a bad outcome for Greece and said his nation would do everything within its powers to help out the fiscally-challenged nation. Despite a report showing a plunge to a two-year low in German investor confidence today, the euro is once again finding a firmer footing nearing a one-week high versus the dollar. The pair recently traded at $1.4386 as investors attempt to look beyond the Greek drama.
U.S. Dollar – The Federal Reserve starts a two-day meeting Tuesday. The central bank’s second post-meeting conference might deliver any decision on a follow-on policy for maturing bonds. Investors expect the Fed to reinvest maturing bonds that were initially purchased as part of the first and second wave of its quantitative easing process. The minor purchases will nevertheless continue to keep the yield curve under some mild pressure as the Fed extends maturities along the yield curve. A report due later Tuesday is expected to show a further disappointing performance for the housing market. Existing home sales for May will likely slip to an annualized pace of 4.8 million and lower by 5% between months. The dollar index is lower by 0.4% at 74.71.
British pound – Tomorrow the Bank of England published the minutes from the recent MPC meeting with investors waiting to see how the vote shaped in after the departure of known hawk Andrew Sentance. Most recent data has largely vindicated the position of the dovish members at the Bank. Today in a speech Markets Director Paul Fisher said that the committee had not yet “ruled out” further asset purchases in an effort to provide further stimulus in the event that it was needed. Mr. Fisher said that such a policy response remained “very much on the table” adding that bond purchases remain a policy weapon. The pound fell after the public sector deficit failed to narrow as much as expected in May. The £17.4 billion deficit was nevertheless bolstered by an 8.2% jump in revenues while spending rose just 2.2%. Observers have recently cast doubt on the government’s ability to meet its target of £122 billion for the fiscal year ending March 2011 in the face of weaker-than-forecast growth and union resistance to job cuts. The pound struggled to make headway against the dollar and recently bought $1.6210 for a slim daily gain. Against the euro the pound was 0.5% lower at 88.71 pence.
Aussie dollar – The Aussie was braced for hawkish rhetoric from the RBA minutes on Tuesday, yet was let down by a laissez-faire approach. The Reserve Bank said that it would be prudent to maintain its 4.75% benchmark in the face of a potential worsening in the European debt drama. The Aussie slipped in response to the minutes and touched $1.0532 before rising later in the New York session to $1.0603. The Aussie is likely to remain slave to international events with downside economic risks playing an increasingly important role. With the bulk of monetary tightening behind it, the tone of the RBA's caution seems to be one of indifference to further rate increases on account of downside economic risks elsewhere.
Japanese yen – The yen remained above ¥80 per dollar for another session although weakness in the Japanese economy remains a heavyweight on the value of the dollar, dragging it down against the Japanese unit. The euro advanced to ¥115.19 while the pound eased to ¥129.90.
Canadian dollar – The Canadian dollar advanced despite weakness in April retail sales. Dealers bought the unit in light of advancing risk appetite and weakness in the U.S. dollar. The Canadian dollar advanced to $1.0262 U.S. cents after the government said retail sales rose 0.3% with six of 11 subsectors accounting for 71% of overall sales advancing. Without motor vehicle sales the report was flat for the month. Leading indicators using latest data available through May rose by 1% after rising by 0.9% in April. That report is a barometer of the future health of the economy.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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