Overnight, the US dollar weakened against most major currencies, as the Reserve Bank of Australia decided to keep rates on hold, pushing the Aussie and a basket of currencies higher. However, the dollar erased some losses against the euro and sterling as European stock markets hit record lows, driving nervy investors back into the “safe haven” dollar. Data from the US showed pending home sales fell 7.7 % in January and Federal Reserve Chairman Ben Bernanke told a Congressional committee that bold government action must be taken to help pull the economy out of recession. Both factors suggested that the financial and economic crises are far from over, giving the dollar additional strength.
As investors trade on fear over the global economy, there has been an inverse correlation between the dollar and the stock markets. The fear and flight of nervy investors helps the dollar rally.
The euro strengthened against the dollar overnight, but lost most of those gains after the Organization for Economic Co-operation and Development expected further rate cuts from major central banks including the European Central Bank and the Bank of England. The ECB is expected to cut rates by 50 basis points this Thursday to an all-time low of 1.5 percent.
The British pound erased earlier gains against the dollar after UK share prices turned negative, and data showed February UK construction activity shrank at a record pace. The UK finance minster Alistair Darling said the Bank of England may start buying assets with newly created money to pump unlimited funds into the economy as part of the first installment of quantitative easing. Analysts are expecting the first installment to occur after Thursday’s BoE meeting, which is expected to cut benchmark rates from 1 to 0.5 percent.
The yen weakened against the dollar as Japan’s finance minister announced BOJ will dip into its large foreign exchange reserves to help ease corporate financing for Japanese firms operating overseas. Toyota may be one of the first borrowers, seeking 200 billion yen to help cover rising credit costs in the US.
The Canadian dollar rallied overnight against the greenback, but consolidated gains after the Bank of Canada cut rates by 50 basis points, bringing down their benchmark rate to a record low 0.5 percent. Furthermore, the Canadian central bank hinted to more rate cuts in the future and turning towards unorthodox measures to boost growth.
The Australian dollar strengthened against the US dollar after Reserve Bank of Australia held rates at 3.25 percent, confounding those expecting rates to be cut by at least 25 basis points. Although the doors were left open for future moves, the RBA said Australia’s economy had stimulus pipelines in place, to avoid the depths of recession seen elsewhere.
The New Zealand dollar remains unchanged against the US dollar. Many investors bet for the New Zealand’s central bank to cut rates by 50 – 100 basis points on their March 12th meeting.
