Daily Forex Outlook: Dollar (USD) Stays Lower with Fed Meeting in Focus

on Dec 12, 2012

With the US Federal Reserve starting its two-day policy meeting on December 11, expectations about further monetary stimulus are already weighing on the greenback, pushing it down versus both the yen and the euro. The single currency for its part found some support and hovered above two-week lows, as reported by Reuters.

**Fed Stimulus Expectations Weigh on the Greenback**
On December 11, Bloomberg reported that demand for the US dollar was limited with investors weighing the prospects for a US budget deal. The greenback lost 0.1 percent versus the euro, to $1.2957, whereas the dollar index, tracking the greenback’s movement versus the currencies of several US trading partners, dropped 0.1 percent to 80.240, after declining 0.1 percent on December 10.

“It’s almost certain the Fed will announce that they are going to start buying Treasuries outright once Operation Twist ends,” commented Ray Attrill, global co-head of currency strategy at National Australia Bank Ltd (ASX:NAB, PINK:NABZY) as quoted by Bloomberg. “I suspect there will be a dollar-negative knee-jerk reaction.”
The greenback bought ¥82.33 after sliding 0.2 percent to ¥82.36 on Monday. Yet, analysts see the US dollar advancing against Japan’s currency given the prospects of the Liberal Democratic Party (LDP) winning the upcoming election in Japan. “The dollar is consolidating after rapid rise, with people looking at the Fed and the US fiscal cliff,” noted a trader at a Japanese bank, as quoted by Reuters. “But the dollar could jump further if the LDP and its ally gains more than two-thirds of seats.”

**Euro Advances despite Mario Monti’s Resignation**
The single currency, which on Monday lost ground on account of Mario Monti’s announcement that he would be stepping down as Italy’s Prime Minister, found some support. “The euro’s dip below $1.2900 proved to be short-lived,” noted Vassili Serebriakov, strategist at BNP Paribas (EPA:BNP, PINK:BNPQY), as quoted by Reuters. “FX markets are showing some notable resilience following news of Monti’s imminent resignation.”

!m[The Single Currency (EUR) Above Two-Week Lows](/uploads/story/1007/thumbs/pic1_inline.png)The euro fetched ¥106.68, from ¥106.58 on December 10, when the single currency touched ¥105.98, the weakest level since November 28. Bloomberg however quotes Bank of America Merrill Lynch as saying that the euro may drop to its lowest level in almost four weeks.

**Higher-Yielding Currencies Gain**
Expectations about the outcome of the Fed meeting also boosted higher-yielding currencies, Reuters reported on December 11. The New Zealand dollar advanced 0.2 percent to a nine-month high of $0.8358 against its US counterpart. “The recent data out of New Zealand has supported the case for the Reserve Bank to maintain its neutral bias and not cut interest rates,” noted Mike Jones, a currency strategist at the Bank of New Zealand, as quoted by Reuters. “That’s helping the kiwi dollar outperform.”
The Australian dollar dipped briefly following an unexpected decline in Australia’s business confidence but clawed back losses to trade at $1.0482. The Canadian dollar edged up to a two-month high of C$0.9862 against the greenback. Bloomberg reports that Mexico’s peso appreciated 0.3 percent to 12.8090 per US dollar, boosted by fiscal cliff progress optimism, which improved the outlook for Mexico’s exports.


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