Dollar continues to sell off amid expectations for QE3

Tom Tong13/Sep/2012Currency Updates

GBP

Sterling hit a four-month peak against the dollar on Wednesday, tracking gains in eur/usd, after Germany’s Constitutional Court ruled in favour of ratifying the eurozone’s new rescue fund subject to certain conditions.

The ruling paves the way for the European Stability Mechanism (ESM) to be used to tackle the eurozone debt crisis and sent currencies perceived as riskier rallying across the board.

The pound rose against the dollar after the ruling. Additionally, sterling was helped by better-than-expected UK employment figures. The number of British people claiming unemployment benefit unexpectedly fell in August, raising hopes of an improvement in the labour market.

UK economic data, including recent PMI surveys, have been stronger than expected, suggesting the economy may be emerging from recession.

EUR

The euro rose to a two-month high against sterling on Wednesday after Germany’s Constitutional Court gave its approval to the eurozone’s new rescue fund, allowing it to be ratified under certain conditions.

The single currency has performed creditably over the past week, thanks largely to the European Central Bank’s announcement last Thursday that it would be throwing its full weight behind a renewed, deeper bout of bond purchasing.

The euro also pushed to a fresh four-month high against the dollar, amid speculation that the US Federal Reserve will announce a third round of quantitative easing measures when the FOMC meet this evening.

USD

Dollar hit a four month low on Wednesday as the greenback came under broad pressure on speculation the U.S. Federal Reserve could announce further monetary easing this week that potentially could debase the currency.

Obviously all eyes will be on the Fed decision later today where the Fed ends its two-day meeting later on Thursday with the policy result expected to be released later the same day which will be followed by Chairman Ben Bernanke’s news conference.

The Fed is projected to announce a third round of bond purchases today, according to economists in a Bloomberg survey, while also extending the duration of its zero-interest-rate policy into 2015. Two rounds of purchases totaling $2.3 trillion have failed to revive the labour market, which Fed Chairman Ben Bernanke said last month is a “grave concern.”

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Written by Tom Tong

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