Economical News
USD
Simulative government policies are being played out in the market as the USD rose to its highest level against the EUR since February of last year. At the same time poor sentiment is also being thrown into the market as the Federal Reserve announced a new $540 billion lending facility for ailing banks to shore up the money market industry. With the newest government program, the Fed continues to send signals to traders that the financial crisis has not subsided.
Currently, Euro-Zone recessionary fears are helping to drive the USD's recent gains. The GBP dropped below the $1.6700 level, shedding a whopping 749 points as the Bank of England said the British economy may see its first recession since 1992. The IMF also issued its fall report on the European economy which reaffirmed its recessionary forecast for the British and Euro-Zone economies.
It is perceived that the U.S. economy is better positioned to stave off a recession with a relatively low interest rate to help spur economic growth. A continuation of a poor economic outlook in Europe will continue to work in the Dollar's favor, perhaps reaching a level below $1.2500 by the week's end.
We are seeing an environment in which the USD is appreciating across the board. The continuation of economic weakness outside the U.S. and a drop in Crude prices may keep the Dollar heading higher. Traders should look to the UK today as we have seen particular price volatility in the GBP/USD pair.
EUR
A stark report from the International Monetary Fund released yesterday predicts that all of the major European economies will soon hit a recessionary period. Average growth across the continent may slow to 1.3% this year and decrease to 0.2% in 2009.
With signs of inflation dwindling due to the economic slowdown, the ECB may be in a position to lower interest rates to spur economic growth. This may have a negative impact on the EUR as traders may price in future interest rate cuts, reducing the yield on the EUR. Some economists have estimated the ECB may ease rates by 100 basis points with inflation dropping and the price of Oil steadily declining. The ECB may have room to ease interest rates well into the next year to the level of 2.25%.
The head of the IMF also stated that despite the recent EUR/USD depreciation, the EUR remains overvalued. This statement may have helped to fuel yesterday's 362 point drop for the EUR/USD. Weak Euro-Zone economic data is driving the currency lower to levels not seen in 21 months. The EUR also fell against the JPY to a level not seen since June 2005.
In early morning trading today, the Dollar broke the psychological mark of $1.300. The catalyst pushing the EUR lower is the performance of the Euro-Zone economy. The EUR may have gone from heavily overbought to a relative fair value. Perhaps there may be room for further drops in the EUR/USD.
JPY
The Japanese currency surprisingly gained in relation to its counterparts, despite predictions of a recession and a sudden drop in Japan's stocks yesterday. The JPY gained 153 points on the Dollar yesterday and nearly 600 points versus the EUR, reaching a price not seen since April 2004. The large gains were spurred by perceived future cuts to interest rates in the Euro-Zone and deteriorating economies abroad.
What the market is seeing here doesn't represent fundamental data, but a crutch. Worried investors are still moving away from high yielding currencies and risky assets. Investors move out of these riskier positions and are using the JPY as the fall back, fueling demand and appreciating the JPY against its pairs.
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