The U.S. dollar traded in mixed direction overnight, gaining against the pound, but falling against the Euro and Japanese yen. Despite the slight pull back against Europe’s common currency, the dollar was able to hold on to much of its gains from Friday. The dollar is likely to remain range bound ahead of the Fed’s interest rate decision on Wednesday afternoon. It is widely expected that the Fed will keep interest rates at an all-time low, but market participants will look for signs as to when policy makers will begin removing quantitative easing and eventually raise interest rates in 2010. At 10 a.m., manufacturing activity in the U.S. is expected to expand for the third consecutive month in October, with economists forecasting the ISM index to increase to 53.0 from 52.6 the previous month. Also, pending home sales are expected to hold flat in September, while construction spending is anticipated to fall 0.2% from August. Weaker-than-expected data will buoy the greenback, as the dollar continues to trade in lock step with risk sentiment.
The Euro gained against the U.S. dollar, erasing some of its losses from Friday’s steep decline against the greenback. The common currency will likely trade in choppy ranges ahead of European Central Bank’s interest rate decision on Thursday, and the Governing Council will likely hold a neutral policy stance going into the new year. The economic docket showed the final manufacturing PMI reading for the Euro-Zone showed outputs increased for the first time since May 2008, with the index rising to 50.7 from 49.3 in the previous month. Nevertheless, ECB board member Christian Noyer held a cautious outlook for the region and said that “problems are stemming from the weakening of the dollar and the pound,” and stated “excess volatility and disorderly exchange-rates have adverse implications” for the economic recovery as the global financial systems remains weak.
The Japanese yen declined against most of its major counterparts, but flat against the U.S. dollar, as higher U.S. equity futures showed a slight rebound in risk appetite. Japanese Finance Minister Hirohisa Fujii said events in the U.S. are causing the yen to rise against the dollar and he is watching the movements closely. Low interest rates in the U.S. and the bankruptcy filing of CIT Group are among the reasons Japan’s currency is rising against the dollar, he said. The yen continues to be a proxy for risk, so expect the currency to take its queue from interest rate decisions in Europe and the U.S. later this week.
The British pound weakened against the greenback as investors anticipate the Bank of England to expand its asset purchase program at their policy meeting this week despite strong economic data. The economic docket showed manufacturing activity in the U.K. unexpectedly expanded in October, with the index rising to 53.7 from a revised reading of 49.9 in previous month. The Hometrack housing price survey increased 0.2% for the same period, with the annualized reading slipping 4.2% from the previous year after tumbling 5.6% in September. Nevertheless, ex- BoE board member David Blanchflower argued that the central bank will “have to do more quantitative easing” and said that the government should “keep stimulating the economy” in an effort to foster a sustainable recovery. If the Bank of England does in fact add to its already expansive quantitative easing program, the pound will continue to soften against its major rivals.
