Dollar weakens ahead of FOMC meeting

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.

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