The US dollar fell as investors took profit ahead of today’s outcome of the Federal Reserve two-day meeting and amid recent mixed economic data. Traders are waiting for the accompanying statements for clues on sentiment and whether the central bank has plans to expand its asset-purchasing program. Policy makers will most likely acknowledge that economic growth is picking up, while committing to keeping interest rates near record lows.
The euro and British pound were propped up by a weaker US dollar despite bearish sentiment in their country. Euro zone industrial production fell in June, suggesting that the economy is still fragile. At the same time, the Bank of England said inflation will stay below its 2 percent target as its economy undergoes a “slow and protracted” recovery. UK Central bank Governor Mervyn King said it is “more likely than not” that inflation will slow below 1 percent this year and unemployment reached a 14-year high. Thus, UK interest rates are expected to remain on hold for a while.
The Japanese yen softened after wholesale prices in Japan dropped a record 8.5 percent in the year to July, due to lower oil prices. The data indicates growing deflationary pressure in the economy. Thus, interest rates in Japan are expected to remain on hold at least until 2011. Next week, the market will eye Japan’s gross domestic product data, which is expected to show a 1 percent rise in the second quarter after four straight quarters of contraction.
The Canadian dollar rebounded as U.S. stocks and crude oil prices rose. Also supporting the loonie was news that Canada’s trade deficit narrowed more than expected in June, after U.S. demand for oil boosted exports.
Both the Australian and New Zealand dollars were battered by a fall in Asian stock markets in the wake of yesterday’s news that Chinese exports sagged 23 percent in July from a year earlier. Negative news from China hurt the Australian currency because China is one of Australia’s main export markets. Meanwhile, losses were tempered on optimism that the economy is starting to pick up, evidenced by upbeat business confidence, which rose to its highest level in two years in July as firms reported better sales, profits and employment.
