Dollar sells off and risk assets rally as US FOMC announces further monetary stimulus

Tom Tong14/Sep/2012Currency Updates

USD

The dollar hit a four-month low against its major currencies, extending its losses after the U.S. Federal Reserve announced a new round of monetary stimulus to promote U.S. job creation, investment and consumption.

The greenback tumbled in the hours following the Federal Open Market Committee’s announcement that it would buy $40 billion of mortgage-backed securities a month until the job market improves, pumping more money into the economy to keep interest rates low and spur more lending and investment.

The Fed’s decision not to specify a specific limit for the amount of bonds it will purchase to keep the economy growing drew the most attention, indicating that the central bank’s gloomy outlook may weigh on the dollar for many more months.

The Federal Reserve’s latest big move to help the economy comes in the midst of an election campaign, provoking criticism from Republicans and cheers from Democrats. Also, U.S. wholesale prices in August posted the largest one-month gain in more than three years; fresh evidence that advancing energy costs could create inflationary pressures.

Meanwhile, the number of U.S. workers filing applications for jobless benefits rose last month because of the fallout from Hurricane Isaac, which hit several Gulf Coast states late last month.

EUR

The US Fed’s announcement regarding QE3 yesterday triggered a rally for the euro against the greenback last night. It resulted in the EUR breaking through resistance levels and reached a new 18-week high. The euro was set for the longest stretch of weekly gains against the yen in three years as the Asian stock market rose to spur risk friendly behaviour.

Though there was no high tier data released yesterday for the euro, the currency is still riding on confidence that is echoed from Germany’s “go ahead” signal for the ESM ratification.

Today, there is a single high tier set released from the eurozone, August Consumer Price Index. On the other hand the CPI is estimated to be unchanged and there is little information out there to suggest otherwise. On the downside there is a risk of potential profit-taking behaviour on the euro by traders today as the weekend stop is coming closer; this could potentially take some of the edge off of the euro’s strong finish this week.

GBP

Fundamentals were sparse for the pound yesterday, as it continued to trade as a low-beta version of the euro yesterday, strengthening significantly against the dollar to hit a fresh four-month high, whilst falling against the euro to reach its lowest point since the beginning of July.

There was some low-tier data released from the UK however, with labour data showing that the number of people out of work fell by 7,000 to 2.59 million in the three months to July, compared with the previous three month period.

Further, U.K. house prices increased for the first time in three months in August as demand rebounded from a lull earlier in the summer.

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Written by Tom Tong

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