Fed to Leave Rates at Historic Lows

The US dollar fell against most major currencies after the Federal Reserve repeated their pledge to keep interest rates ‘exceptionally low’ for an ‘extended period.’  The Fed did say that emergency measures to support the troubled housing market will end this month as planned. The Fed also said that the US economy has “continued to strengthen” but that “housing starts have been flat at depressed levels” and “employers remain reluctant to add to payrolls.” Fed Chairman Ben Bernanke is trying to decide how long to hold interest rates down to generate a solid recovery. Diane Swonk of Mesirow Financial in Chicago stated, “The recovery continues and remains on track to be subpar, at best. Businesses are finally stepping up to the plate and spending their cash flow, but the housing market and prospects for a broader-based recovery remain dim.” A recent report by the Commerce Department showed that housing starts were down 5.9% in February and the Obama administration told congress that unemployment is likely to “remain elevated for an extended period.” Many are starting to believe the phrase ‘extended period’ is political speak for ‘we don’t really know. ‘Speaking about the ‘extended period’ language David Tien of Fischer Francis Trees & Watts said, “The ‘extended period’ language means about three to four meetings of no change. This supports emerging market and peripheral currencies.”

EU Will Aid Greece

The euro gained on the greenback and the yen after EU finance ministers devised strategies for loans to Greece which has been a drag on the euro. Greece’s Prime Minister George Papandreou’s government is attempting to close budget deficits which are four times the 3% that EU rules allow. An unnamed EU official said that any aid to Greece would probably come from EU governments pooling funds for direct loans to Greece.

Commodity Linked Currencies Gain

Rising risk sentiment pushed the Canadian dollar also known as the ‘loonie’ to a two year high vs. the US dollar. Rising oil and gold prices helped to push the Loonie, the S African Rand and the Aussie dollar higher in currency markets. Almost half of all Canadian exports are raw materials including substantial quantities of oil. Precious metals account for about one fourth of S Africa’s exports.  Recent reports showing a rise in Chinese exports benefitted the Aussie dollar. Australia is one of China’s chief suppliers of raw materials. So far this year the loonie has gained 3.9% vs the US dollar. Many experts say the Fed’s statement prompted investors to seek higher yielding assets and currencies. Jack Spitz of National Bank of Canada stated, “The statement’s likely to put a bid to commodities and by extension commodity currencies, most notably the Canadian and Australian dollars. Ultimately, by continuing to maintain interest rates low it will continue to promote growth and what we get with that is seen through rising equities.”

Quick Forex Tip: There are many factors that affect currency exchange rates and those who want to trade forex markets should be familiar with them. Economic factors are probably the most important in determining the value of a currency. Political conditions can also affect exchange rates. Those who want to trade forex markets would be well advised to keep abreast of current political and economic events. Thanks to the internet, those with the right knowledge and an internet connection can join this exciting market and take advantage of the lucrative opportunities it can provide for investors.

UK Manufacturing Falls in January

The pound remained under pressure for the third straight day and is on track to hit its lowest level against the US dollar in ten months after a report showed that UK manufacturing contracted. UK manufacturing fell 0.9% in January, the first time in five months according to a report from the Office for National Statistics. Economists had predicted a gain of 0.2%. Concerns about the UK’s debt rating also pressured the pound. Jeremy Stretch of Rabobank International stated, “Sterling remains weak amid ongoing concerns over debt ratings and political dynamics. The production data may have been impacted by the bad weather in January, and this may play into the broader sterling negativity.”

UK to Devise Strategies to Maintain Extraordinary Measures

Prime Minister Gordon Brown said he will deliver this year’s budget statement on March 24th and said that the UK’s economic recovery is still ‘fragile.’ Chancellor of the Exchequer Alistair Darling said that the government will devise strategies to maintain extraordinary measures as long as recovery is fragile. Political problems have also affected the pound’s performance in currency markets. Support for the Conservatives has been dwindling. The conservatives believe more spending cuts are necessary to maintain the UK’s debt rating. Daragh Maher said in a report that, “It will be an interesting budget, having to strike a balance between doing enough to prevent a downgrade, but giving enough to try and get re-elected. An announcement of a general election should follow shortly thereafter.”

Fitch’s ratings service said the UK needs to reduce budget deficits to 3% of GDP by 2014-2015. A representative of the service said that the UK’s spending adjustments are moving at ‘too slow’ a pace. Investor concerns that the UK is lagging behind the US and other nations in exiting the global recession has made the pound the worst performer in currency markets this year. The uncertain political situation in the UK is putting further pressure on the already troubled pound. Parliamentary elections, which must be held by June could result in political gridlock if either party fails to gain a clear majority and could hamper efforts to deal with massive deficits.

Portuguese Bond Sale, Chinese Data Lifts Euro

Wednesday brought a rare piece of good news for the troubled euro. The euro gained on the US dollar and the yen as strong Chinese export data and a better than expected Portuguese bond sale lifted risk appetite among investors. Portugal, which had planned to sell EUR750 million in bonds, ended up selling EUR990 million worth of long term bonds. Some analysts expect the euro to remain under pressure until some EU nations implement further austerity measures.

Quick Forex Tip: Political conditions play a major role in global currency trading. Political instability can cause a currency to lose value. Recently political problems and deficit concerns in Greece caused the euro to fall in global currency trading centers. Market psychology although difficult to define can also affect market perceptions and can either help or pressure currencies.