eur news

US Dollar Trades Higher Ahead of Critical FOMC Rate Decision

Monday, 06 August 2007 18:54:20 GMT  |  David Rodriguez, Currency Analyst

The US dollar recovered from strong overnight declines, as a return to risk appetite and jump in domestic bond yields lent the greenback support through the New York afternoon. An empty day of economic event risk left the US currency to trade off of broader market developments, leaving USD pairs particularly susceptible to moves in the global carry trade.

The Euro initially rallied to multi-week highs against the dollar before remaining nearly flat at $1.3788. British Pound trading was similarly volatile, but Cable finished the mid-day at 130 points off of Friday’s close to $2.0287. A slight bounce in the carry trade left the dollar ¥0.25 higher to ¥118.23 Yen.

A quiet calendar forced forex traders to look forward to tomorrows Federal Reserve Interest Rate Announcement, which is almost guaranteed to drive sharp moves across all US dollar currency pairs. The FOMC is very widely expected to leave rates unchanged through tomorrow’s meeting, but markets will be especially sensitive to the attached statement. Given recent turmoil across financial asset classes and signs of moderating growth, dollar bears predict that the Fed will shift to a more neutral stance on monetary policy. Fed-watchers have lent an especially keen eye to the most recent Non Farm Payrolls data; a 0.1 percent jump in the headline US Unemployment rate is thought to be a harbinger for further slowdowns in domestic expansion. Coupled with early signs of moderating core inflation, futures traders have positioned themselves for at least 25 basis points in interest rate cuts through the end of the year. The US dollar clearly stands to lose on any substantive shift in Fed sentiment, leaving risks to the downside ahead of tomorrow’s FOMC statement.  

Stock markets remained upbeat ahead of tomorrow’s critical central bank meeting, with the Dow Jones Industrial Average trading an impressive 158 points higher through late afternoon trade. The S&P 500 saw the biggest percentage recovery at +20 to 1,453.39, while the tech-heavy NASDAQ Composite gained 23 points to 2,534. Bargain hunters buoyed overall market performance, as traders repurchased financial stocks following their recent rout. It remains to be seen that such a short-term advance will hold, however, with the short term outlook on domestic equities contingent on tomorrow’s FOMC statement.

Fixed income markets saw a similar retracement on the day, with the benchmark 10-year Treasury Note down 3/8 of a point to 98 and 3/16. Yields were softly off of recent multi-month lows, gaining 5 basis points to 4.73 percent. Like their stock market and forex counterparts, outlook on fixed income assets will almost entirely depend on tomorrow’s Fed meeting.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars