Investors sold dollars aggressively on Wednesday but less than 24 hours after the Federal Reserve decided not to taper asset purchases the greenback recovered all of its losses against the Japanese Yen and is trading higher against sterling. The euro, Swiss Franc, New Zealand and Canadian dollars extended their gains against the greenback but the moves have been modest. While the weakness in sterling can be attributed to softer U.K. data, the rapid-fire recovery in USD/JPY may have caught some traders by surprise. New highs in the Nikkei helped to lift all of Yen pairs but the prospect of more stimulus from the Bank of Japan is also hitting the currency. BoJ member Kiuchi said the central bank could be influenced by external factors such as market expectations and will be forced to respond in such a way.

It should be no surprise that the actions of the Federal Reserve can have global repercussions. When Bernanke talked tapering in July, he drove global bond yields higher, creating a headache for other central banks. Now, their decision to delay a reduction in asset purchases can also pose a problem for central banks of countries such as Japan, Australia and New Zealand who may have been banking on U.S. dollar strength to ease pressure on their own currencies. If their currencies continue to strengthen versus the dollar, these central banks may have to offset the drag on the economy with easier monetary policies.

This morning’s U.S. economic reports were relatively good which should support Bernanke’s thesis that if they keep the pedal to the metal, the recovery should solidify and gain momentum. Manufacturing activity in the Philadelphia region expanded at its fastest pace since March 2011 while leading indicators rose 0.7% and existing home sales grew 1.7%. The country’s current account deficit also narrowed to -$98.9 billion, its best level in 11 years. Jobless claims rose less than expected but the Labor Department said the data continues to be distorted because two states are still working through their backlog of applications after a computer upgrade. Yet all of these reports were better than expected, keeping the dialogue about Fed tapering this year alive.

Meanwhile weaker retail sales data has made the British pound the worst performing currency this morning. Consumer spending dropped 0.9% in the month of August. While the contraction in spending reported by the British Retail Consortium signaled that retail sales could be weak, few expected the largest decline in 10 months. The pullback in demand can be blamed on food sales, which soared in July but plunged in August. If consumer spending fails to recover significantly in September, retail sales could subtract from GDP growth in the third quarter. Considering that there are no major U.K. reports expected on Friday or scheduled for release next week, the decline in consumer spending could cap gains in sterling in the near term or at least limit its rise relative to other currencies. However if the PMI reports due the first week of October confirms that the recovery still underway, we could see renewed gains in the pound.

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