Foreign Exchange Market Daily Update

The US dollar was a touch weaker against a basket of currencies. Expectations of further interest rate cuts were cemented after minutes from the Fed's January policy meeting were released. In the minutes, the Fed indicated concern over the US economy even after aggressive rate cuts and lowered its 2008 US growth forecast sharply as more setbacks were foreseen. Many investors are forecasting another 50 point cut at the next Federal Open Market Committee's meeting on March 18th, lowering the federal funds rate to 2.5 %. In other news, the US jobless claims fell to 349,000 from an upwardly revised 358,000, which stands at the highest level in more than two years.

The Euro traded within a narrow range against the dollar. In a statement released by the European Commission, euro zone economic growth is expected to slow to 1.8 % in 2008 from 2.7 % in 2007, while inflation should stay well above the ECB target. EU executives forecasted a weaker year due to high commodity prices, sharp economic growth slowdown in the US and financial market turmoil. In January, the euro zone hit a record high inflation of 3.2 % in 11 years, making it hard for the ECB to cut rates. Therefore, unlike the dollar, investors scaled back the extent of ECB rate cuts, giving the euro a helping hand.

The British pound made a comeback against the dollar, after much stronger than expected UK retail sales data. Sales grew 0.8 % in January recuperating from a 0.2 % fall in December, which was their strongest growth in almost a year. This prompted investors to scale back expectations of rate cuts by the BoE. However, analysts indicated that the move in rate expectations and in sterling may be prematurely overdone, due to seasonal swings which lent the hand to stronger retail sales data. Like the US and the euro zone, BoE policymaker Andrew Sentence said Britain's economy may be on track for it's a sharp slowdown, though the risk of recession is remote.

The Japanese yen remained relatively unchanged against the dollar. With hopes of further US rate cuts relatively cemented after minutes from the Fed's January meeting release, investor risk appetite was boosted, bringing the low-yielding yen under pressure.

The Canadian dollar was little changed against the US dollar. With an alarming economic downturn in Canada's biggest trading partner, investors fear the effect could spill across the border. To some extent, the loonie has been supported by strong oil prices which hit a record high on Wednesday.

The Australian and New Zealand dollars rose against the US dollar with gains in commodity prices and a rally in US stocks. With the rally in US stocks, investor confidence in carry trade was boosted as they partook in purchasing high-yielding assets by borrowing funds from the low-yielding currencies such as the Japanese yen.

Union Bank of California
The Bank of Tokyo-Mitsubishi Group

Posted in: Forex