NEWS / Foreign Exchange

The U.S. dollar rose discreetly as the market awaits the FOMC announcement

The U.S. dollar rose discreetly as the market awaits the FOMC announcement at 1815 GMT.  Investors are looking for language that the Federal Reserve will continue to focus on inflation.  That would boost the dollar as the currency would maintain its yield advantage, especially since the market has returned the spotlight on carry trades, where investors borrow in low-yielding currencies like the yen and Swiss franc to invest in higher returning currencies.   

Japanese yen fell across the board this morning due to renewed interest in carry trades.  Focus remains on the FOMC meeting later this morning.  If the Fed signals towards a rate cut, which would reduce Japan??™s wide interest rate spread with the United States, that could fuel more yen carry trade winding. 

The euro remained sidelined against the US dollar awaiting the FOMC meeting.  As central bank diversification is maturing and the US trade deficits have been stabilizing, the long term EUR rally since 2002 seems to be coming to an end.  If risk aversion eases in the near-term, the market could buy still buy more EUR as the ECB maintains rate hikes.

Meanwhile, sterling pared earlier gains against the dollar and euro after dovish minutes from the Bank of England reduced expectations of a near-term interest rate hike in April or May. 

The Canadian dollar jumped higher versus the greenback as domestic retail data and the leading indicator helped support the loonie.  While January retail sales dropped 0.2%, the decline was largely in line with expectations, and the composite leading indicator rose 0.7%, the sharpest monthly gain since mid-2004.

The Mexican peso strengthened against the US dollar and Mexican stocks rose 1.88% after strong US housing data yesterday easing concerns over the health of the US economy.  Mexico??™s export sector is closely tied to the US economy.  

Kiwi remained strong near three-week highs and the Australian dollar touched a fresh 10-year high against the US dollar as investors priced in an anticipated interest rate hike by Australia??™s central bank as early as next month.

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