by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar found support close to 1.4750 in early Europe on Tuesday and from highs near 1.4660 settled close to 1.47 ahead of theFederal Reserverate decision.
Following the latest FOMC meeting, the Fed funds rate was cut by a further 0.25% to 4.25%, the third successive reduction. There was a 9-1 vote for the move with Rosengren dissenting and calling for a 0.50% cut. In the statement, the Fed made reference to increased uncertainty over growth and inflation trends. It also stated that business and consumer spendinghad softened slightly while there was also concern that the housing correction had intensified.
The discount rate reduction was also held to 0.25% compared with hopes that the Fed would do more to ease liquidity pressures. The limited discount rate cut triggered a sharp retreat in carry trades which also dragged theEurodown against the dollar to lows around 1.4640.
Markets overall will be expecting the Fed to cut rates again during the first quarter of 2008 which will lessen the potential for dollar buying support. Markets will monitor the retail sales evidence later this week to assess the extent of any downturn in consumer spending with a weak result increasing pressure for further measures. Volatility levels are liable to remain higher, especially with tightening liquidity.
The German ZEW index weakened further to -37.2 in December from -32.5 which was the lowest level since the beginning of 1993. The ZEW institute also stated concerns over the economic developments which will curb Euro support even with markets expecting that the ECB will retain a restrictive policy stance.
Yen
The yen weakened to lows beyond 112.0 against the dollar in early Europe on Tuesday and tested levels near 165 against the Euro. The Japanese currency was able to regain some ground as global equity markets failed to hold their best levels.
The yen then gained sharply following the US Federal Reserve interest rate decision as the refusal to sanction a bigger cut in the discount rate triggered a sharp unwinding in carry trades asWallStreetcame under strong selling pressure. The yen pushed to highs around 110.50 against the dollar.
Swiss franc
The Swiss currency weakened to lows beyond 1.6650 while the franc also tested support levels beyond 1.1350 against the dollar. The franc regained some ground following the Federal Reserve decision as there was an important unwinding of carry trades.
The consensus at this stage is that the National Bank will leave interest rates on hold at Thursday’s quarterly meeting. Any suggestions from bank officials of an increase over the next 36 hours would provide some short-term franc backing.
Source: VantagePoint Software, Market Technologies, LLC
Australian dollar
TheAustralian dollarpushed to a two-week high towards the 0.89 level againstthe US dollarin local trading on Tuesday. Global risk appetite continued to improve on hopes that central bank policy action would alleviate stresses and this encouraged support for the Australian currency.
Sentiment will still be fragile and the dangers were illustrated by a sharp dip in the Australian dollar following the Fed decision. With the US discount rate cut held to 0.25%, the currency dipped sharply to lows around 0.8715 against the US dollaras Wall Street lurched lower.
