special reports

FED, ECB, BOE, and BOC Join Forces In Coordinated Rate Cut

Wednesday, 08 October 2008 11:10:38 GMT  |  David Song, Currency Analyst

In a coordinated effort, the central banks of the major economies around the world have lower their respective benchmark interest as the credit crunch spreads throughout the global financial markets. In fact, the FOMC, ECB, BOE, SNB, BOC, and the Riksbank have stated that the financial crisis has intensified considerably, and noted that the downside risks for growth have increased significantly.

Fed Chairman Bernanke’s statement following the unexpected rate cut highlighted the comments made yesterday, stating that the economic downturn has accelerated in recent months, while falling commodity prices have helped to limit the upside risks for inflation. The FOMC voted unanimously to lower the benchmark interest rate to 1.75%, with the target rate now standing at 1.50%.

Meanwhile, the ECB stated that the spillover effects of the credit crunch has heightened growth concerns for the Euro-Zone, but noted that the bank will continue to monitor upside price pressures in order to avoid second-round effects. The BoE also joined in to lower their benchmark interest rate to 4.50% and decided to deliver a rate cut ahead of the scheduled meeting for tomorrow, but warned that inflation is likely to accelerate beyond 5.0% over the following months amid falling oil prices. The MPC has announced that the policy meeting set for tomorrow will be canceled.

 

Amid the extraordinary efforts by the central bank, forex traders continue to move out of high risk/reward investments, which have strengthened low-yielding currencies such as the Japanese Yen and the Swiss franc. Meanwhile, the flight to safety has certainly lowered the appeal of high yielding currencies such as the Australian and New Zealand dollar.

Central Banks Could Fail to Restore Investor’s Confidence, We Expect Further Losses on USD/JPY

"The Federal Reserve, in coordination with other central banks, has been taking a number of actions to stabilize financial markets. However, the U.S. economy  will continue to face substantial challenges including further job losses, high energy prices and a rapid deleveraging in the financial sector. The Japanese yen could be the main beneficiary of the credit crisis and we expect more USD/JPY weakness going forward". 

Antonio Sousa, Chief Strategist for DailyFX, asousa@fxcm.com

Read More...

Resources

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