The U.S. Dollar extended a decline against the majority of its counterparts on speculation the Federal Reserve will embark on another round of bond purchasing while leaving the interest rate at zero until 2015. The Dollar continued to drop after a German Constitutional Court handed a victory to Chancellor Angela Merkel by rejecting motions to block the region’s permanent bailout fund. On the data front, U.S. Import Prices increased 0.7 percent, which marked the first hike in five months, while fuel prices went up, though not as much as predicted. The greenback remained under pressure following a warning by Moody’s Investors Service indicating that it would lower the country’s AAA rating to AA1 if a policy addressing debt reduction isn’t implemented soon. The Canadian Dollar retreated from a 13-month high versus the U.S. currency as strategists suggested that the currency’s value is inching closer to level considered to be overvalued. The Loonie advanced over the past five days as market investors believe the Federal Reserve is getting ready to announce further measures needed to bolster economic growth.
In the Euro region, a German court approved the ratification of the European Stability Mechanism, fueling higher demand for the 17-nation currency. Chancellor Merkel, who has championed the bailout facility, stated “this has been a great day for the Euro bloc as well as for the world.” The Court also mentioned that Germany will only contribute 190 billion Euros to the fund. According to analysts, this clears the way for the European Central Bank to proceed with the bond purchasing program announced last week. Following the news, Italy’s borrowing costs plunged, reflecting the feeling of optimism that reigned in the markets. The British Pound erased some of its early gains against the U.S. Dollar after economic reports indicated that the country’s Unemployment rate went from 8.0 to 8.1 percent.
In Japan, Finance Minister Jun Azumi stated that the Yen’s previous gains had been speculative in nature and the Japanese government is therefore ready to intervene in order to stop the Yen’s rising value. Officials confirmed that the Yen climbed 0.7 percent in one day while adding that any action by the Federal Reserve may prompt the Yen to rise further.
Lastly, the Australian Dollar traded at a three-week high versus the greenback in anticipation of the Federal Reserve’s meeting as well as on comments by China’s Premier, Wen Jiabao, who suggested that China is also considering further monetary easing. The New Zealand Dollar rose to a one-month high against the U.S. monetary unit as investor confidence increased following the German court ruling.
EUR/USD- German Court Clears The Way
The markets grew optimistic as the German Constitutional Court issued its ruling clearing the way for the ratification of the new bailout fund and allowing Germany to make its contribution to the ESM. The Court also ruled that Germany would be limited to a contribution of 190 billion Euros. The Euro rose to the highest level since May against the U.S. Dollar.
GBP/USD- Pound Retreats From Highs
The British Pound erased early gains and retreated from its four-month high against the U.S. Dollar following the release of mixed economic data which dampened demand for the Sterling. The Pound’s losses were limited though, as optimism took over market sentiment following Germany’s top court ruling approving the ratification of the region’s permanent bailout fund. On the data front, Claimant Count dropped by a seasonally adjusted 15,000 in August after economists predicted a hike of 500 people. Reports also indicated that Unemployment went from 8.0 to 8.1 percent when analysts forecast it would remain unchanged. The British currency also dipped against the Euro.
USD/JPY- Dollar Sell-Off Affects Yen
A quick sell-off of the U.S. Dollar caused the Yen to extend gains, and according to analysts, an announcement by the Federal Reserve instituting further easing could cause the Japanese currency to rally even higher. This has made Japan’s government nervous and Finance Minister, Jun Azumi has suggested the possibility of an intervention. Later in the day, the U.S. Dollar climbed against the Yen but stayed near a three-month low in anticipation of today’s Fed meeting. On the data front, Core Machinery Orders increased more than forecast in July, going up 4.6 percent. Other releases revealed that the Tertiary Industry Activity declined 0.8 percent in July which is more than anticipated.
AUD/USD- Aussie Reaches 3-Week High
Australia’s Dollar reached a three-week high against the U.S. currency after demand for high-risk assets increased on speculation that the U.S. and China will implement further stimulus to fuel economic growth. The Aussie Dollar gained against the majority of its peers as Germany’s Constitutional Court ruled in favor of allowing Germany to contribute to the region’s permanent bailout fund, and cleared the path for the ratification of the ESM. On the data front, the Westpac Banking Corporation indicated that Consumer Sentiment increased by 1.6 percent in September after it posted a 2.5 percent decline in August.
Today’s economic calendar reveals that Switzerland will report on PPI and will issue the Interest Rate Decision. In the E.U. the ECB will release the Monthly Report. The U.S. will announce Initial and Continuing Jobless Claims, PPI and Core PPI, the FOMC Statement, and the Interest Rate Decision; furthermore, Federal Reserve Chairman Ben Bernanke will deliver a speech.