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Daily U.S. Forex Summary

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In another attempt to calm the global financial markets

Thu, Oct 9 2008, 07:14 GMT
by Union Bank of California Team

Union Bank of California

In another attempt to calm the global financial markets, the US Federal Reserve led a coordinated round of global official interest rate cuts on Wednesday, lowering the federal funds rate half a percentage point, as did the European Central Bank, Bank of England and Swiss, Canadian and Swedish banks. The US dollar fell against major currencies, while the yen surged as investors questioned whether coordinated global rate cuts by central banks were sufficient to free up the credit market. Initial euphoria over the rate cuts quickly fizzled, with stocks on Wall Street opening lower, before stabilizing and the greenback extending its losses against the yen.

The euro traded range bound again today as round of global rate cuts which included the European Central Bank did little to help the single currency. After an initial rally, European stocks fell, sending the Dow Jones Stoxx 600 Index to its worst three-day retreat since October 1987, on concern the coordinated interest-rate cut by the six central banks won't prevent a global recession.

Sterling rose against the US dollar but fell versus the euro under volatile trading on Wednesday as markets digested the UK government's multi-billion pound rescue package for its embattled banking sector. The government's package includes plans to inject up to 50 billion pounds into the country's largest banks, aimed at stemming the deepening financial crisis.

The Japanese yen rose to a three-year high against the euro and gained versus the US dollar as interest-rate cuts by global central banks failed to boost confidence, encouraging investors to sell higher-yielding assets. Japan's currency also surged against the Australian dollar, the New Zealand dollar and the Norwegian krone on speculation a plunge in global stocks will lead to a drop in carry trades. The Bank of Japan, which didn't participate in the global rate cut move, said it supported the action.

The Canadian dollar immediately rose against the greenback after the Bank of Canada’s rate announcement. The Bank of Canada unexpectedly cut its key interest rate by 50 basis points to 2.50 percent on Wednesday in a coordinated effort with other central banks to help calm ailing financial markets. The Bank of Canada stated that weaker growth in the US and other key trading partners will increase the drag on the domestic economy coming from net exports. It also stated that easing of the Canadian dollar will help cushion the effects of the weaker global outlook on the domestic economy but will not completely offset them.

The Australian and New Zealand dollars slumped to their lowest level in more than five years against the greenback as investors sold higher-yielding assets on concern frozen credit markets will stall the global economy. The Australian currency fell the most since 1983 as rising exchange-rate swings, a drop in commodity prices and a rout in stock markets damped the appeal of the so-called carry trades, where investors seek higher returns on investments funded in countries with lower borrowing costs.

The Mexican peso plunged the most since the government abandoned a currency peg in December 1994 as concern mounted that a global credit crisis will deepen even as central banks cut interest rates across the world.

Published on  Thu, Oct 9 2008, 07:16 GMT