Dollar slips as Fed announce intention to keep record low interest rates

Tom Tong26/Jan/2012Currency Updates

EUR

The Euro hit a four-week high against sterling on Tuesday, but analysts doubt it will retain sufficient strength to crack its long downward trend, even as the pound faces mounting headwinds of its own. German Chancellor Angela Merkel appealed to business leaders at the World Economic Forum to give policy makers the space they need to tackle the debt crisis, pledging that Europe will pull together and restore confidence. This is likely to be a short term reprieve for the single-currency, and Ebury maintains its bearish view on the Euro due to upside challenges from remaining concerns about Europe’s ability to come to grips with its debt crisis, with any negative developments seen as giving investors an excuse to sell into the short-squeeze rallies.

GBP

Sterling, though, could face another hurdle next month if the Bank of England decides to roll the presses again and expand its program of bond purchases, a policy known as quantitative easing. Sterling’s weakness on Tuesday arrived after total U.K. public-sector debt topped £1 trillion ($1.557 trillion) in December, the highest level since records began in 1993. On the flip side, December’s borrowing was less than expected, putting the U.K. ahead of deficit-reduction targets. British PM Cameron, speaking to world leaders, economists and business chiefs at the WEF, will warn today that competitiveness remains Europe’s “Achilles heel”, with the single market incomplete, and “unnecessary” measures from Brussels that were burdening businesses and “can destroy jobs”.

USD

Yesterday had a significant impact on the future of the global economy as the Federal Reserve made a key announcement on the US interest rates and said that they do not expect to be raising levels until late 2014. This unexpected data moved the markets considerably and as a result weakened the dollar against most major currencies, as the US government caused borrowing costs to fall. This information which is a regular policy statement from the central bank, said it saw “significant downside risks” to the economy. As a result inflation had fallen back to a level in line with its mandate. The rates are going to continue to remain in a target range of between zero to 0.25%.

Ben Bernanke highlighted that the US economy has a grim outlook ahead of them as the Fed opened the door a bit wider for the return to buying securities in the months ahead to buttress a weak recovery and keep inflation from slipping too far below its newly adopted 2-percent target. This announcement is unlikely to see interest rates increase until late 2014,therefore a year beyond its previous guidance, immediately pushed down Treasury bond yields and Bernanke’s comments to the media raised expectations of a further round of so-called quantitative easing, or QE3.

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Written by Tom Tong

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