What a month it has been for foreign currency trading! First it was up and down for the dollar, with a two week hold- then it was steady for the euro until the euro zone debt crisis proved to be too much and the euro tanked. Now, it’s the dollar we are once again reporting on for major losses in the forex market. Ahead of the FOMC minutes, the dollar caves under the pressure of it all. This doesn’t automatically mean the euro is doing well- although in the past the two play teeder-tooder- and while the euro has a slight head on the dollar, it’s still not fairing so well itself. The euro is now at a record low against the Aussie dollar and 3-1/2 year low against the pound! This new weakness (in addition to the record setting lows of last week) comes as the prospect of a quick ruling in the constitutional court meeting in Germany seems extremely unlikely. The euro is also looking quite vulnerable to rising peripheral yields.
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The euro rose against the dollar but weakened against other
major currencies on unease over how policymakers will tackle the
debt crisis after it appeared there would be no quick judgment
from a German court on the euro zone’s bailout fund.
It held above a two-year low against the dollar but remained
vulnerable, dropping to a three and a half year low against the
UK pound and a record low versus the higher-yielding Australian
dollar.
Alongside doubts fed by the debt crisis, the single currency
remained under pressure after the European Central Bank’s
decision to cut interest rates last week, bringing the deposit
rate to zero.
The FOMC minutes “will be eagerly awaited by market
participants for clues regarding the outlook for monetary
policy,” said Eric Theoret, currency strategist at Scotiabank in
Toronto. “Clues regarding the outlook will arise from the
discussion of other, more active measures that some of the more
dovish activist policymakers may have sought to pursue.”
The euro was up 0.1 percent against the dollar at
$1.2260, albeit still not far from Monday’s two-year low
A break below Monday’s low would open the door to a test of
the June 2010 trough of $1.1875.
The Fed minutes, due for release at 2 p.m. EDT (1800 GMT),
will throw more light on the central bank’s plans after U.S.
policymakers expressed different opinions on the need for more
easing.
“If we do get some announcement of more QE (quantitative
easing) in the U.S. then it will provide support for euro/dollar
and we could see a squeeze of short euro positions,” said Paul
Robson, currency strategist at RBS in London.
“But the euro will stay weak on low yield, weak growth and
debt uncertainty.”
Analysts said any renewed rise in Spanish and Italian
government debt yields could push the euro down further as
concerns about political hurdles and scepticism over the euro
zone’s decision-making process grow.
The ECB’s rate cut removed a pillar of support for the euro,
raising chances it could become a funding currency of choice for
buying higher-yielding assets.
The euro fell to its weakest against sterling
since late 2008, while it hit an all-time low against the
Australian dollar.
The Australian currency also gained against the U.S. dollar
, backed by its higher Australian yields. It was last up
0.7 percent at $1.0252.
UNCERTAIN ROAD AHEAD
Some market players had been hoping for a quick ruling from
Germany’s Constitutional Court on whether the European Stability
Mechanism (ESM) and planned changes to the euro zone’s budget
rules were compatible with German law.
But the decision looks likely to take several weeks, with
Finance Minister Wolfgang Schaueble saying he hoped a judgment
would be passed before the autumn.
“People will be aware the non-decision we have got (from the
court) might be a severe problem if yields really pick up and
then euro/dollar will come under pressure,” said Lutz Karpowitz,
currency strategist at Commerzbank in London.
There were also concerns about Italy, whose Prime Minister
Mario Monti said on Tuesday the country could be interested in
tapping the euro zone’s rescue fund to ease its borrowing costs.
The euro earlier fell to a five-week low against the yen
. It was last down 0.2 percent at 97.05.
The dollar fell 0.3 percent against the yen to 79.18 yen
but held above chart support at its 200-day simple moving
average at 78.98, as investors awaited the outcome of the Bank
of Japan’s two-day policy meeting beginning on Wednesday.
The BoJ is expected to hold off on easing monetary policy
despite moves in that direction last week by the central banks
of Europe, Britain and China.
On Wednesday, just ahead of the release of the details behind the monthly meeting of the Federal Reserve, the dollar took a sharp and sudden fall. Investors predict another round of asset purchases in the following months to try and stimulate growth in the U.S. economy. This caused a rise in the euro- but only against the dollar, is remained very week against the other major currencies. More news about how policymakers plan to handle the euro zone debt crisis actually weakened the euro- then combine that with the situation surround the court hearing in Germany about the constitutionality of the euro zone’s bailout fund.
There’s defiantly major uncertainty on the road ahead for both the euro and the U.S. dollar- this type of shakiness is not working in favor of either currencies.
Are you surprised that the dollar is getting weaker and is still down against the extremely weak euro?
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