The U.S. Dollar gained as investors reacted to Wednesday’s news in which the FOMC announced it would implement a new stimulus plan. A sell-off of risk assets prompted by lackluster data out of the Euro region, and fears of a global economic slowdown, helped further strengthen the U.S. currency. Germany and France continued to oppose the idea of Eurobonds which also contributed to the greenback’s rally. Dollar enthusiasts may thank the Swiss National Bank for intervening in the market. Analysts expect the U.S. Dollar to continue appreciating, given the disproportionate amount of Dollar purchases at this time. Meanwhile, the Canadian Dollar fell the most in 16 months versus its U.S. counterpart; investors are concerned that Canada’s biggest trading partner’s economy is faltering. They also believe that the Federal Reserve doesn’t possess the right tools needed to revive the economy. Recent statements by Fed Chairman, Ben Bernanke, indicating that “operation twist” may pose a significant downside risk to the U.S. economy, spurred the speculation.
The 17-nation currency spiraled downwards into the $1.34s following market reactions to the FOMC decision and as economic reports showed a drop in PMI. These last metrics led investors to believe that the Euro zone is facing a deep financial crisis. Furthermore, the lack of consensus between leaders prompted a sell-off of the shared currency. German PMI pulled the rug from under investors’ feet as Germany has been considered the stalwart of the E.U. members. Some analysts say that the weakening of the Euro can be mostly attributed to the Dollar’s safe haven appeal, especially now that they can’t count on the Swiss Franc as refuge, and as Japan is inching closer to intervening in the market. The Pound also declined as a lack of confidence in the U.K.’s economy reduced appetite for risk. Analysts believe the U.K.’s economy is “flat-lining” despite the low levels of unemployment and the fact that the country is not in a recessionary mode.
Japan’s currency strengthened as the other majors slumped following the FOMC decision to implement further easing measure. The Yen also rose as Euro-zone worries dominated market sentiment. And if the global outlook wasn’t dim enough, China reported disappointing economic data, indicating contraction in its growth. Investors purchased the Yen despite concerns that intervention may take place sometime soon.
And lastly, the Australian Dollar dropped to a six-month low versus the U.S. currency as China revealed that its manufacturing sector contracted. New Zealand’s monetary unit also slipped to the lowest price in over four months against the greenback as the government reported a lower than anticipated second quarter growth. The two currencies dipped further against most of their peers as stocks and commodities plummeted after Fed Chairman Bernanke stated that the U.S. economy may be facing “significant downside risks.”
EUR/USD- Euro Spirals Down
The Euro spiraled downwards as the region’s strongest economy reported a drop in PMI. German Manufacturing revealed a dip to 50.0 and Services slumped to 50.3. Both figures were dangerously close to 50, an indication that the region’s financial crisis may be worsening. The shared currency was also weighed down by the fact that the region’s leaders continue to disagree on the Eurobond issue and have not managed to reach a consensus on how to overcome the crisis.
GBP/USD- Confidence In U.K. Economy Drops
The Pound Sterling continued to drop versus the greenback, reaching the low $1.50s. A sudden dip in confidence compounded with fears of contagion given the country’s proximity to the Euro zone has led investors to opt for safe havens. The hike in Public Sector debt shown in Wednesday’s data highlighted the fact that stricter austerity measures may be in order. A renewed pessimistic outlook for the U.K.’s economy may continue to weigh further on the Sterling.
USD/JPY- Yen Rises As Investors Seek Refuge
The Yen rose against the U.S. Dollar, the Euro and the Pound as the markets spiraled downwards following news that the Federal Reserve will implement additional easing; the currency rallied as the Euro-zone’s economic metrics fueled further concerns over the sovereign debt. Wednesday’s data indicated that exports didn’t fare as well as expected and this led to fears of an impending intervention. But this didn’t stop investors from buying the Yen as risk aversion took over the markets.
AUD/USD- Aussie Tumbles To New Lows
The Australian currency dropped to a six-month low against the greenback after a survey showed that Manufacturing in China declined. This took place as output and export fell. The Aussie Dollar dropped further as stocks and commodity prices plummeted.
Today’s economic calendar is light. It shows that the Euro region will report on French Consumer Confidence. The U.K. will release data on BBA Mortgage Approvals. And ECB President, Jean-Claude Trichet, is scheduled to deliver a speech. Japan’s markets will be closed in observance of the Autumn Equinox and there are no reports due out of the U.S.