Central bank policy actions were a clear focus for the week and triggered substantial currency moves. The US currency then weakened very sharply after the Fed meeting and the US currency was on track for the sharpest overall weekly decline for 20 years.

As expected, the Federal Reserve left the Fed funds target interest rate at 0.00 – 0.25%. The Fed stated that the economy was continuing to contract and that inflation could remain at very low levels for a prolonged period given the economic weakness.


The main focus was also on the statement given the importance of quantitative easing. The Fed was much more aggressive than expected as it announced that it would step-up the pace of credit expansion. The Fed announced that it would buy up to US$300bn in long-term Treasury bonds over the next six months. In addition, it will also increase its purchase of mortgage bonds by US$750bn to a potential US$1.25trn.

The decision to expand direct credit supply substantially undermined confidence in the US currency directly due to fears over medium-term debasement while it also increased risk appetite which tended to lessen defensive support for the dollar.

The US manufacturing data was generally depressed as production declined by a further 1.4% while the New York Empire index also weakened further to a record low of -38.2 in March from -34.7 previously. The Philadelphia Fed index improved slightly to -35.0 for March from -41.3 the previous month, although the employment and prices components weakened to fresh record lows.

Elsewhere, initial jobless claims fell to 646,000 in the latest week from 658,000 previously which was slightly lower than expected while the number of continuing claims rose to a fresh record high at close to 5.5mn.

The housing data was stronger than expected with starts rising sharply to an annual rate of 0.58mn for February from a revised 0.48mn the previous month as apartment starts were notably firm. There was also a rise in building permits to 0.55mn.

The fourth-quarter current account deficit fell to US$133bn from a revised US$181bn previously which will lessen the US financing requirement. The latest capital account data recorded net long-term outflows of US$43bn for January following inflows of US$34.7bn previously. The overall account recorded net outflows of US$148.9bn.

Official Chinese holdings rose over the month and much of the outflows appears to reflect hedge-fund activities, but there was unease over the capital account situation given reports that China was concerned over the risk of capital losses.

The German ZEW index edged higher to -3.5 in March from -5.8 and this was the highest reading for 18 months. The institute reported that conditions remained extremely bad, but there were the first signs of hope while the bottom of the recession was likely to be reached during the Summer of 2009.

The comments from ECB officials suggested that they would consider lowering interest rates slightly further, but there was still resistance to non-conventional policy measures.


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The Euro initially resisted pressure for more than a limited correction and then advanced powerfully against the dollar with a peak above 1.37 against the US dollar. The currency was also generally firm on the crosses as other currencies weakened.

The yen again found support close to 99 against the US currency during the week and strengthened sharply to highs beyond 94. The gains primarily reflected dollar vulnerability and the yen was unable to make any headway on the main crosses.


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Following its council meeting, the Bank of Japan left interest rates on hold at 0.10%. The bank indicated that it would move to buy up to US$1trn of subordinated debt issued by banks to help ease credit difficulties. The central bank also increased its programme of government bond buying with additional purchases of JPY21.6trn over the next 12 months.

The UK unemployment claimant count rose by 138,400 for February after a revised 93,500 increase for January. This was the biggest monthly increase for at least 30 years with the unemployment total at a 10-year high.

The latest public-sector finance data recorded a record-high net borrowing of GBP75.7bn in the first 11 months of the fiscal year from GBP21.9bn the previous year. The IMF also warned that the UK economy would fare worse than the US and Euro-zone economies with the risk of a further small GDP contraction for 2010 following a decline of near 4.0% for 2009.

Sterling came under pressure following the weak employment data, but domestic developments were overshadowed by Federal Reserve action and Sterling pushed to a four-week high against the dollar close to 1.46. In contrast, the UK currency dipped to seven-week lows against the Euro beyond 0.94 as volatility spiked higher.

Attention continued to focus strongly on the National Bank and its determination to stop franc appreciation. Chairman Roth stated that intervention was designed to minimise the deflation risk rather than boost competitiveness in global markets.

Fellow member Jordan took a downbeat tone and stated that it was necessary to relax monetary policy too much rather than not enough given the economic deterioration.

The franc still managed to secure a robust advance against the dollar to highs beyond 1.12. The Australian and Canadian dollars also made firm gains for the week.