Dollar In The Doldrums As Fed Gathers
Apr. 26 2011 - 10:50 am
Image by AFP/Getty Images via @daylife
The Federal 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 adds 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.
U.S. Dollar – For the first time the Fed will host a press conference after it concludes its meeting. The media will have its first opportunity to drill Chairman Ben Bernanke on where he thinks the economy is heading after he delivers prepared remarks. Data released Tuesday showcases the ongoing, albeit gradual, decline in the housing market in the form of the Case-Shiller/S&P index, which showed nationwide metropolitan home values were down 3.3% from a year ago.
The dollar index has fared poorly over the past week, continuing a painful erosion. Tuesday the index eased 0.2% to 73.82, close to its weakest level since August 2008. Later in the week, first-quarter U.S. GDP is expected to show slower 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 advantage of the lame dollar, 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. Trichet warned of 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 17-nation currency 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 loonie despite improving risk appetite elsewhere. Crude oil futures for June delivery are trading over $112.00 per barrel and the price of gold has come off another record-high, yet neither is providing the fillip for the Canadian currency that might be expected. The loonie currently buys $1.0466 U.S., compared 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 indicators managed a marginal advance to 64.5 from 63.4. The index is compiled using latest available data to predict economic conditions six months out. The Aussie also advanced versus the Japanese yen to buy ¥87.86.
Japanese yen – An all-around drubbing of the dollar has favored the Japanese unit, though it’s highly unlikely 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 may be 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 though it slumped toward session lows mid-morning 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.
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