Two-Year Euro Low
The dollar rose against other major currencies this week, coming off an earlier two-year low as traders reaffirmed the Federal Reserve’s interest-rate statement that was released in the previous session. The Federal Open Market Committee held its benchmark federal funds rate unchanged at 5.25%. The Fed repeated that “some inflation risks remain,” but took out the reference to “the extent and timing of any additional firming.”
Many strategists interpreted the removal as a sign that the Fed is no longer predisposed to raising rates. “The dollar rebounds off its post-FOMC lows as traders reevaluate the excessive selling in the U.S. currency,” said Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York. It was “an overreaction to the FOMC statement.” “The Fed’s replacement of the phrase ‘additional firming’ with ‘future policy adjustments’ does not constitute an explicit abandonment of the tightening bias because of the maintenance of the inflation vigilance, which in fact was stepped up from the January statement.”
In New York trading, the euro stood at $1.3367, compared with $1.3381 late Wednesday. In intraday trading, it had risen to $1.3410, the highest level since March 2005. The dollar was quoted at 117.62 yen, compared with 117.58 yen. The British pound traded at $1.9701 compared with $1.9673. The dollar changed hands at 1.2096 Swiss francs, compared with 1.2098 francs. The euro fetched 157.27 yen, compared with 157.40 yen.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said while the dollar has recovered against most currencies, “the tone is fragile and short-term technical indicators warn that even these modest dollar upticks have left it over-extended.” “North American players are likely to sell into the dollar’s firmer tone,” he said in a note. Leading indicators The dollar trimmed some of its gains after the Conference Board said the U.S. economy is likely to grow at a moderate but “choppy” pace in the coming months.
The index of leading economic indicators fell 0.5% in February, close to the 0.4% drop expected by economists surveyed by MarketWatch. The index fell a revised 0.3% in January, compared with a 0.1% gain originally reported. Earlier, the greenback showed little reaction to data showing a drop in U.S. jobless claims in the latest week. Seasonally adjusted initial claims fell by 4,000 to 316,000.
The four-week average of new claims, considered a better gauge of underlying activity because it smoothes out one-time events such as holidays and weather, fell by 3,750 to 326,000. Federal Reserve Chairman Ben Bernanke on Thursday did not comment on interest-rate policy or the market reaction to the FOMC statement in his remarks at the Credit Risk and Credit Derivatives conference. Yen, Swiss franc Elsewhere, the yen and the Swiss franc came under some pressure as rising equity markets overseas prompted traders to return to their carry trade positions.
Carry trades refer to the practice of borrowing or selling lower-yielding currencies such as the yen and reinvesting in higher-return currencies and assets, such as the British pound or the Australian dollar. ‘The prospects of Fed rate cuts have re-invigorated carry trades,” said David Watt, senior currency strategist at RBC Capital Markets. Also on Thursday, the British pound briefly rallied in the wake of a much stronger-than-expected report on February retail sales.
U.K. retail sales improved 1.4% in February compared to January, or up 4.9% from last year. Economists were looking for a rise of 0.8% month-on-month and 4% year-on-year. Despite monetary policy committee member David Blanchflower’s call for lower rates at the March interest-rate meeting, “these numbers tend to switch the focus for the next U.K. rate hike back towards sooner rather than later and to April rather than May,” said David Brown, economist at Bear Stearns, in a note.
“With domestic demand running so strong and Chancellor Gordon Brown adding an extra dollop of stimulus through tax cuts, the BoE will see this as an additional inflation risk that needs to be capped off with higher rates,” he said.