The US$ was lower overnight against the euro and yen, while extending gains yesterday against the British pound. The Federal Reserve moved yesterday to lower the Fed funds target rate by 75 basis points to 2.25%. The market was largely anticipating a cut to 2.00%. However, the move helped to spark a rebound in the US$ and a large rally in U.S. equity markets. Today, U.S. equity markets are indicated modestly lower, but with a large rally yesterday, this can be expected. Morgan Stanley this morning reported first quarter earnings that beat expectations, helping to extend the belief that brokerages will weather the subprime mortgage crisis. This could help continue to bolster confidence within the market that a solid bottom might be in place. Ultimately, this would benefit the US$ as confidence is restored in US$ backed assets. No significant data is set for release today and ahead of European holidays on Friday and Monday, the market is likely to digest recent information. This could help the US$ rally in coming days.
Overnight, the euro moved higher after a report by Bank of America suggested that the Federal Reserve might have another 75 basis points in easing to do. Each time a report like this is released, the market is reminded of the stark contrasts between the ECB’s policy and the Fed’s. Other news overnight suggested that the ECB might be bracing itself for an eventual slowdown of its own. ECB member Mersch stated that the Eurozone will not withstand the “ripple effects” of a U.S. slowdown. This should be beneficial for the US$ moving forward.
The yen continues to remain supported by expectations that the crisis is not contained. The statement overnight by ECB’s Mersch reinforces the idea that the crisis is really of a global nature and that, even if the U.S. is pulling out, risk aversion will continue to play a large role. Therefore, it is difficult to imagine that the yen will weaken substantially until a period of calm has entered markets and sentiment for risk reemerges. When it does, you might see yen weakness snowball as investors again take advantage of Japan’s low interest rates.
Sterling was lower overnight after risk aversion was sparked again. The high yielding currencies continue to remain volatile during these periods, as investors move in and out of carry trades. Overnight, news was released that the Bank of England voted 7-2 to maintain rates in March, with the two members suggesting the bank should lower rates. In addition to this news, additional news suggested that the U.K.’s largest mortgage lender, HBOS Plc., was struck by rumors that it too had liquidity concerns. Though the lender denied these concerns, the risk aversion struck the market and reminded investors that the U.K. economy is also in a housing-led slowdown.
