U.S. Forex Market Commentary

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.5435 level and was capped around the $1.5645 level.  The common currency reached its lowest level since 25 March as traders continued to reduce their long euro exposure.  There is a growing consensus that the U.S. economy may have weathered the economic fallout from the credit dislocations that have enveloped the global financial markets since last summer.  This shift in sentiment has benefited the U.S. dollar.  The Federal Open Market Committee yesterday reduced the federal funds target rate by 25bps to 2.00% and reported “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity.”  Notably, Dallas Fed President Fisher and Philadelphia Fed President Plosser voted for no change in interest rates.  Ahead of the FOMC’s announcement, the markets were pricing in no change in policy at the FOMC’s next meeting.  After the announcement, the odds of additional near-term interest rate cuts increased.  July Fed funds futures are implying a 16% chance that the Fed’s target rate will be 1.75% after the next FOMC meeting on 24-25 June.  Data released in the U.S. today saw April ISM manufacturing unchanged at 48.6 while the prices sub-index increased to 84 and March construction spending fell 1.1% m/m. Additionally, March personal spending expanded 0.4% m/m and March personal income was up 0.3% m/m.  Moreover, the core personal consumption expenditures index was up 0.2% m/m and 2.1% y/y. It was also reported that weekly initial jobless claims were up 35,000 to 375,000 while continuing jobless claims were up 74,000 to 3.019 million, the highest level since April 2004.  In eurozone news, most European markets were closed for the May Day holiday and liquidity will be significantly reduced until Monday.  Euro bids are cited around the US$ 1.5345 level.