The U.S. dollar gained against all of its major rivals as investors scaled back their appetite for risk and commodity prices came under pressure. Lower European and Asian stocks, along with lower U.S. equity futures led investors to shun higher yielding assets in favor of the relative safety of the greenback. The dollar will likely to trade in volatile ranges as the Fed begins its two-day meeting today. The central bank is widely expected to hold interest rates at historic lows, but investors will be tuning into the Fed’s statement on Wednesday afternoon for any hints as to when it plans to start removing stimulus. Meanwhile, factory orders in the U.S. are expected to rise 0.8% in September after unexpectedly falling 0.8% in the previous month. If U.S. equities remain under pressure throughout our trading session, the dollar should benefit, as funds should flow to the “safe-haven” dollar.
The Euro lost significant ground against the U.S. dollar as European stocks fell to a two month low as UBS AG reported a wider-than-estimated loss. UBS sank the most since May as Switzerland’s largest bank posted its fourth consecutive quarterly loss, driving markets lower. However, the Euro will likely trade in choppy ranges over the next few days as market participants wait for the European Central Bank’s interest rate decision on Thursday. Meanwhile, the European Union raised its growth forecast for the economy and projects GDP in the euro-region to expand at an annual pace of 0.7% in 2010 and 1.5% in 2011, but continues to see a 4.0% contraction this year. However, the EU continued to see a risk for a protracted recovery as the jobless rate is expected to hit 10.75% in 2011. The Euro will continue to trade with risk, therefore if equities continue to trade on their back foot, expect the common currency to remain under pressure.
The Japanese yen gained across the board, while trading flat against the dollar, as the pair benefited from safe haven flows. The yen advanced as stocks fell on evidence banks are struggling to shake of the effects of the global recession, sapping demand for higher yielding currencies. With U.S. equities pointed to a higher open, expect the yen to remain firm against its major counterparts.
The pound fell overnight as investors flocked to the U.S. dollar and Japanese yen as a hedge against risk. The U.K. government increased its stake in Royal Bank of Scotland Group Plc and Lloyds Banking Group, causing stocks to falter. The economic docket for the U.K. showed construction spending fell at a faster pace in October and the PMI reading slipping to 46.2 from 46.7 in the previous month amid expectations for a rise to 47.2. At the same time, Chancellor of the Exchequer, Alistair Darling, said economic conditions have improved and expects the growth rate to expand in the new year, but went onto say that it may take years for the government to recoup taxpayers funds used to bailout Lloyds Banking Group and Royal Bank of Scotland as financial conditions remain far from favorable. Therefore expect the pound to remain under pressure ahead of Bank of England’s interest rate decision on Thursday, as the central bank is likely to hold its dovish done.
