The Federal Open Market Committee has recently stated that it would continue to purchase $85bn of securities per month and the Fed Funds Rate will remain at its current low level as long as unemployment rate remains above 6-1/2%.
The US Dollar Index hit a high of fresh 5-week high around 83.5 last Friday and then had a correction. The rally in US dollar was due to better-than-expected jobs data last Thursday, with initial claims posting a five-and-a-half year low, falling to 323,000 in the week ended on May 3.
The Federal Open Market Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy stance as the outlook for the labour market or inflation changes.
The euro is currently at $1.29 and last week it broke below 1.3000 against dollar for the first time in two weeks.
The euro traded in the range of 1.27-1.35 in the month of April against the dollar. The inflation sinking down to 1.2% y-o-y in April 2013 from 1.7% in March 2013 was a cause of worry, on account of which the ECB cut the rates. It is expected that the rate cut of 25bps is unlikely to boost the growth materially.
Euro remains supported by relative monetary policy between the eurozone and the US. If the Fed shifts to a less accommodative stance then the euro is likely to weaken under the weight of the European backdrop.
The British pound is at $1.54. It fell against dollar last week after UK construction and trade data was announced. UK construction output rose by 12.1% in March 2013, which is the largest monthly rise in construction in over a year, still lower than the anticipated 15.0%.
The UK total trade balance was reported at a deficit of £3.13bn, slightly worse than an expected £3.1bn. The Bank of England opted against pumping more money into the British economy last week.
Relative monetary policy temporarily favours the British pound, but as Mark Carney prepares to lead the BoE in June this year, it is expected a more aggressive BoE to emerge, ultimately weighing on the pound into year-end.
The Japanese yen has broken the current 100 psychological level and is trading at $101.62. The Nikkei markets are up close to 40.5% on year-to-date basis, the highest in the last five years. It has weakened yen beyond dollar for the first time in four years.
Japan’s output growth is expected to grow by 1.25% in 2013-14, with the weaker yen supporting the export sector.
The recent Bank of Japan (BoJ) policy announcement, which includes the expected doubling of the monetary base to ¥270tn by the end of 2014 and annual govenrment bond purchases of ¥50tn, is likely to drive yen weakness.
The BoJ aims to bring annual rate of inflation to 2% in two years’ time by expanding the monetary base. A falling yen can boost Japan’s automobile exports. The continued accommodative policy of Japan‘s central bank and possibility of domestic investors buying overseas bonds can weaken Japanese yen.
The Swiss franc is trading at 0.96 as against dollar, the highest since late August 2012. The dollar surged to an 8-1/2-month-high against the Swiss franc last Friday on account of surge in dollar purchases.
A recent data indicated that Swiss consumer prices continued to fall on an annual basis in April 2013, which supported the case for the Swiss National Bank to maintain the cap on the franc it introduced to ward off deflation. In Sept 2011, to prevent deflation and a recession, the Swiss National Bank capped the franc at 1.20 per euro.
The Australian dollar plunged to its lowest level in more than 10 months on increased concern about the outlook about Australia. The Australian currency traded recently at US$1.0006 after earlier falling as low as US$0.9961.
The weakening trend in Australian dollar, accelerated after the Reserve Bank of Australia cut its benchmark lending rate by a quarter percentage point, which surprised the investors.
The currency markets have witnessed significant volatility in recent times on account of accommodative monetary policies of various central banks.
