by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar continued to edge weaker ahead of the Federal Reserveinterest ratedecision with lows around 1.4470. The US currency attempted to rally after the announcement, but then weakened again to test fresh record lows around 1.45.
The Federal Reserve cut interest rates by a further 0.25% to 4.50% by a 9-1 vote with Hoenig dissenting and voting for unchanged rates. In the statement, the Fed remained cautious over growth and took a more balanced view on inflation. The Fed effectively switched to a neutral policy, while it stated that market strains had eased slightly. The remarks overall suggest that the Fed wants to dampen expectations of a further cut in rates. The neutral statement should provide some dollar support, although confidence will remain very fragile.
The US data had a mixed tone on Wednesday with third-quarter GDP growth above expectations at 3.9%. Within the data, there was a sharp drop in the housing sector with a drop of over 20% for the quarter, but there was a strong advance for exports. The ADP employment report recorded an increase of 106,000 for October from a revised 61,000 previously which would be consistent with a payroll increase of around 130,000.
The Chicago PMI index, however, weakened to 49.7 in October which will maintain unease over manufacturing. The GDP deflator was higher than expected while the employment cost index was slightly lower than expected at 0.8% for a 3.3% annual increase.
Euro-zone consumer inflation increased sharply to 2.6% in October from 2.1% the previous month and the jump to a two-year high will intensify ECB inflation fears. The latest data also recorded a significant deterioration in business confidence with the EU Commission index dropping to 0.87 in October from 1.08. The combination of higher inflation and weaker growth will pose major difficulties for the ECB and will increase fears over Euro-zone stagnation next year.
The yen has remained generally on the defensive over the past 24 hours with losses to lows around 115.50 against the dollar. The Japanese currency also weakened to beyond 167.0 against the Euro despite securing a brief boost after the Fed decision.
The Bank of Japan left interest rates on hold at 0.50% by a 8-1 margin for the second successive month. In its semi-annual report, the bank warned over economic and financial-market risks with the comments not suggesting that the bank will push for a near-term rate increase. Short-term yield considerations will, therefore, remain yen negative.
China policies will continue to be watched closely with speculation that another interest rate increase is imminent and any near-term tightening would provide some background yen support.
Sterling rose above the 2.07 level against the dollar on Wednesday and, despite brief corrections, strengthened to new 28-year highs above 2.08 in US trading as the US rate cut improved UK yield support.
The latest Nationwide survey reported a 1.1% increase in house prices for October which will boost near-term Sterling confidence even though the underlying risks surrounding the housing sector remain extremely high. UK consumer confidence edged weaker to -8 in October from -7 which was the lowest figure since March.
MPC member Blanchflower stated that the economy was slowing and he also suggested that the US Federal Reserve policy could have a significant impact on the Bank of England. In this context, the Fed rate cut will increase speculation over a UK move. Chief Economist Bean, however, reported that the bank must not be complacent over inflation which will tend to dampen immediate expectations over lower rates.
The dollar recovered briefly back above the 1.16 level against the Swiss franc on Wednesday, but was unable to hold the gains and weakened back to lows around 1.1560. The Swiss currency also lost ground against the Euro as Wall Street
proved resilient. Near-term franc moves will remain correlated closely with global stock market moves.
The Australian dollar remained strong on Wednesday and, despite some initial difficulties in pushing above the 0.9250 level, the Australian currency strengthened to highs around 0.9320 after the Fed interest rate decision.
The domestic data was firm with September building approvals rising by 6.8% while private-sector credit rose 1.2% for the month. Evidence of firm domestic demand will maintain market expectations of a November Reserve Bank interest rate increase and underpin Australian yield support, especially with the US Fed cutting rates again.