NEWS / Foreign Exchange

The U.S. dollar was sold off across the board yesterday and overnight

The U.S. dollar was sold off across the board yesterday and overnight as the market reacted to an unexpectedly dovish statement from the U.S. Federal Reserve. America??™s central bank dropped a reference to possible further interest rate hikes in its post-meeting statement yesterday, stoking expectations for lower rates this year. The Fed??™s statement changed the landscape not just for those who focus on macroeconomic fundamentals, but also for technical analysts who try to gauge future currency movements by scrutinizing price charts. Despite some bold gains by major currencies against the greenback, currencies seem to be shying away from fresh highs versus the dollar, with the euro falling 0.2 percent on the day and even the pound making limited progress despite much stronger UK retail sales data that bolstered UK rate hike expectations. Markets are now awaiting further commentary ??“ scheduled today ??“ from Fed Chairman Bernanke and other Fed officials for more clues on the rate outlook. Look for the dollar to consolidate throughout the day as traders gauge the potential for additional declines in the dollar.

The Euro broke through key resistance levels yesterday but has stalled this morning, dragged down by its losses against the British pound, which rallied broadly on the back of stronger-than expected retail sales data. The Office for National Statistics said UK retail sales volumes rose 1.4 percent in February, twice analyst??™s expectations and the strongest monthly rate since January 2005. The recovery after a weak January put sales up 4.9 percent on the year, the fastest annual rate since November 2004. The data pointed to the potential for British rates to rise above those in the U.S. as the Bank of England fights to keep inflation contained. 

The Japanese yen failed to make much progress versus the greenback yesterday, but received some support overnight from data showing Japanese land prices rose for the first time in 16 years ??“ additional evidence that the nation is emerging from inflation.

The Canadian dollar retreated from yesterday??™s highs against the dollar, spurred by profit taking by traders after a series of gains in recent sessions.
The currency??™s fall drop was cushioned somewhat as oil prices rose closer to $61 a barrel as a dip in U.S. gasoline stocks fueled concerns of tight supplies. The resource-linked currency often moves in line with energy prices due to Canada's
oil exports.
          
The Australian dollar backed off of a fresh 10-year high touched yesterday on modest profit-taking, but is expected to challenge a key technical barrier at 81 cents in the near term. Yesterday??™s gains ??“ which followed the Fed decision ??“ were the sixth straight day of gains for the currency. The Fed??™s decision brought the 100-point gap in official rates between Australia and the U.S. back in market focus, especially with markets pricing in the chance of a rate rise here as early as April.

The Mexican peso edged higher this morning as traders anticipated congressional approval of a pension reform bill and data expected to show cooling inflation. The lower house of Congress is expected to vote on a measure today that would introduce private retirement accounts for public-sector workers. Investors are following the vote because the bill would take pressure off public finances and could bode well for President Felipe Calderon's economic reform agenda. The measure easily cleared lower house committees. In other news, Mexico's central bank will release an inflation report for the first half of March at 2:30 p.m. Mexico City time (18:30 GMT). Analysts polled by Reuters on Wednesday see much-watched core inflation, which strips out some volatile food and energy prices, slowing to 0.20 percent from 0.23 percent during the same period in February. Since September, inflation has hovered near or above 4 percent, the highest the central bank says it will tolerate. The bank warned last month it would raise interest rates if core inflation failed to begin slowing in March.

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