NEWS / Foreign Exchange

USD Struggles Despite FOMC and GDP

10/31/2007 3:29 PM: EUR/$..1.4472 $/JPY..115.36 GBP/$..2.0798 $/CHF..1.1582 AUD/$..0.9313 $/CAD..0.9466

USD Struggles Despite FOMC and GDP

The FOMC lowered its benchmark Fed Funds rate by 25-basis points to 4.5%. The accompany policy statement tempered expectations for another rate cut over the remainder of the year, adopting a more neutral stance and emphasizing that risks to inflation and growth are currently balanced. ???Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance???. Further, the Fed said today??™s 25-basis point cut, in conjunction with the September ease, ???should forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time???. The Fed cited recent increases in energy and commodity prices as ???roughly balancing the downside risks to growth???. The vote was not unanimous with KC Fed President Hoenig voting in favor of leaving rates unchanged.

Economic growth for the third quarter exceeded consensus forecasts, as the economy expanded by 3.9%, versus calls for 3.0% GDP growth and up slightly from the previous quarter at 3.8%. The US economy posted its strongest growth rate since Q1 2006 ??“ thereby bringing to question how aggressively the Fed will continue to ease rates over the coming months. The Q3 PCE price index was higher than expectations at 1.7%, albeit sharply lower than Q2, while core PCE edged up to 1.8% versus 1.4% from the prior quarter. A worrying, but not unexpected component of the GDP report was a large drop in housing investment, which plunged 20.1%, accelerating from an 11.8% decline in Q2.

Meanwhile, manufacturing contracted with the Chicago PMI at 49.7 for October falling short of consensus expectations of 53.0 and down from 54.2 in September. The decline marked the lowest reading in 8-months, while the employment index was down to 49.5.

The dollar continues to struggle against the major currencies, with the exception of the yen ??“ falling to fresh all-time lows versus the euro at 1.4503 and new multi-decade lows versus the sterling, Loonie and Aussie. The market remains bearish on the greenback despite a combination of strong US economic growth data and a neutral tone adopted by the FOMC ??“ suggesting overwhelming market sentiment for further losses to come. The next key piece of data to potentially impact both the December FOMC policy decision and the dollar??™s fate will be Friday??™s October labor report.

JPY Slumps following BoJ

The Bank of Japan left policy unchanged when it announced its decision in early Wednesday trading. The BoJ voted 8-1 to keep interest rates at 0.5%. Governor Fukui said that ???downside risks to Japan are also increasing compared with upside risks???. He added that ???the environment overseas has changed and uncertainty over the global economy persists???. Fukui said that ???if the risk factors materialize, the global economy could worsen more than anticipated, and an adverse impact on the Japanese economy would be inevitable???. The BoJ also reduced its forecasts for growth and inflation, expecting the economy to grow at 1.8% this year, downwardly revised from 2.1% while inflation remains flat compared with a 0.1% estimate from earlier in the year.