Dollar Gains on the Back of Fed Statement
The US$ rallied significantly overnight following more analysis of the Federal Reserve’s statement from yesterday’s meeting. The Fed cut interest rates by 25 basis points but stopped short of stating that they will wait for the previous 325 basis points of cuts to factor into the economy before considering additional stimulus. This was not initially good news to the US$, as it weakened in the aftermath. However, investors began considering what the Fed left out of its statement, instead of everything that it incorporated. Included in this was the assessment that “downside risks to growth remain.” The Fed instead stated that the “substantial” easing to date should “promote moderate growth over time.” While this leaves the door open for further rate cuts, it is clear that the Fed will not provide additional cuts unless the U.S. economy significantly deteriorates. This morning, some second-tier data was released, helping the US$ to strengthen further against the euro and British pound. The Fed’s preferred measure of inflation, the personal consumption expenditure (PCE), rose by 2.1% on a year on year basis. This was slightly higher than the 2.0% expectations. Furthermore, though personal income came in slightly lower, at 0.3% versus 0.4% expectations, personal spending rose by 0.4% compared with 0.2% expectations. Now, the market will focus on the release of April’s employment figure tomorrow at 8:30 a.m. Economists’ consensus calls for a decrease of 75,000 jobs, in line with the previous three month’s declines.
The euro fell sharply overnight as investors become more concerned that economic data from the Eurozone will erode, ultimately forcing the ECB to lower interest rates. Data from Ireland overnight showed that PMI fell to 44.7. While this would normally not influence the euro’s direction, thin liquidity from a European holiday helped the currency gain. The data from Ireland brings to the forefront concerns that periphery European economies, such as Spain, Ireland, and Italy, face higher risk than the major economies of Germany and France. PMI for the other Eurozone economies will be released tonight. Should European data begin to show a decidedly negative turn, the US$ stands to substantially benefit.
The yen was steady overnight as the correlation between equity movements and the yen continues. With much of the world on holiday, from Asia to Europe, there were little moves in equity markets. Investors are unsure whether the worst of the global slowdown has passed or if it is in a quieter period. The Dow Jones Industrial Average briefly rose above 13,000 yesterday before falling sharply in the aftermath of the Fed’s announcement. At this point, investors are looking for optimism from the central bank, something that was lacking from yesterday’s statement. This morning, equity futures shifted lower in the wake of disappointing earnings from Exxon and the data releases. This has kept the yen firm in the wake of broad US$ strength. Until investors decide to assume risk in a heavy way, the yen will continue to oscillate in ranges.
The British pound was lower this morning in broad US$ strength. Despite relatively good U.K. PMI, released at 51.0 versus expectations of 50.8, the pound’s gains against the US$ could not be sustained. Additionally, the Bank of England prepared a report, which stated that the worst of the crisis is behind the U.K. economy. In the medium term, this should help sterling to weather a strong US$ rebound.
