EUR/USD: Is approaching the key 1.5000 mark a break through this level opens the door for an further advance to initially 1.5500 and then 1.6000.

There just seems to be no good news out there for the US dollar; with equity markets rallying yesterday and risk appetite returning the greenback was sold once again. Against the euro the dollar reached a 14 month low and is on the cusp of breaking through the key psychological 1.5000 mark. The Australian dollar continued its rally reaching a 14 month high after Central Bank Governor Stevens said he could not be too timid in raising interest rates as the economic crisis passes. Even the weak sterling managed to scramble together some gains against the greenback.

However, it was not just growing risk appetite that dented the sentiment for the greenback the FOMC minutes were equally, if not more culpable, as it signalled that the Fed is likely to keep interest rates on hold longer than expected. Notwithstanding that staff and growth projections were revised higher for the second half of 2009 and subsequent years the rest of the assessment was rather bleaker than expected. The minutes stated that, “participants anticipated that slack in both labour and product markets would be substantial over the next few years, leading to subdued and potentially declining wage and price inflation”. The minutes continued, “Although the economic outlook had improved further in recent weeks and the risks to the forecast had become more balanced, the level of economic activity was likely to be quite weak and resource utilization low”.

Currency investors took this as a signal that the likes of the euro and Aussie dollar will remain attractive given the positive interest rate differential. Equity investors though appeared to ignore the minutes, focusing instead on the releases of retail sales. The positive cycle of sales increasing, production increasing and inventories falling to begin with coupled with the weaker dollar is fuelling equity investor’s optimism. For the time being these investors seem to be happy looking at the shorter term outlook rather than the headwinds identified by the Federal Reserve.

Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:

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