Dollar Down as Fed Puts Stimulus on Hold

2nd August

 

The USD fell overnight in Asian trading after the Federal Reserve indicated that it may take action to stimulate the US economy but only on an as-needed basis.

Ben Bernanke closed  a 2 day monetary policy meeting with a statement saying the Fed “will provide additional accommodation as needed to promote a stronger economic recovery” but making no changes to interest rates or policy in general, reinforcing earlier positions that it will stimulate the economy if the recovery continues to  deteriorate further. The Fed also stated that interest rates would stay at “exceptionally low levels” until at least the end of 2014, leaving the benchmark interest rate unchanged at 0.25%.

Stimulus measures tend to weaken the currency of the country the measures are implemented in and although no stimulus measures were announced, the USD was down against most of major counterparts – falling 0.20% against the EUR, down 0.23% against the commodity linked AUD and down 0.21% against the Swissie. Stimulus measures tend to push stocks up and generally stocks were mixed to higher overnight. During Asian trading on Thursday, Hong Kong’s Hang Seng Index fell 0.37%, but Australia’s S&P/ASX200 was up 0.23%, whilst Japan’s Nikkei 225 Index climbed 0.41%.

Providing some cheer for the US economy was the release yesterday of surprisingly strong U.S. payroll data. Processor ADP whose figures serve as a weather vane for the official unemployment rate, published Friday, reported earlier that the private-sector increased its numbers by a seasonally adjusted 163,000 in July, beating expectations for an increase of 120,000.

Tempering the good news was disappointing manufacturing data in the US with the Institute for Supply Management’s manufacturing purchasing managers index hitting 49.8 in July, up marginally from a 3 year low of 49.7 hit in June, but below market forecasts for a reading of 50.2.

Today, the ECB is poised for a crucial meeting amidst heavy speculation that it will take action to bring down Spain’s cost of borrowing, with Spain’s 10 year yield recently hit a record high of 7.6%. ECB president Mario Draghi has stated he is ready to do “whatever it takes” to support the euro, sparking a rally in shares and the EUR.