USD Gained Strength : USD Strengthens After FOMC

U.S. Dollar Trading (USD)

U.S. Dollar Trading (USD) was sold most the day as equities around the world rallied on news that the Obama Administration would be looking to create a bad bank to hold toxic assets. The losses were reversed after guidance from the FOMC that buying of US treasuries from the FED was not a sure thing. Crude Oil closed up $0.35 ending the New York session at $41.93 per barrel. In US share markets, the Dow Jones gained 200 points or 2.46% and the NASDAQ gained 53 points or 3.55%. Looking ahead, December Durable Goods are expected to drop -2% vs. -1.5% previously. Also released, December New Homes Sales are forecast at 0.4m vs. .407m previously.

European Euro

The Euro (EUR) retested the 1.33 key level but was rejected quite violently as the FOMC statement helped the USD. Weighing intraday was weaker than expected German CPI in January at -0.5% vs. -0.3% forecast. Overall the EUR/USD traded with a low of 1.3104 and a high of 1.3328 before closing the day at 1.3160. Looking ahead, German Unemployment is forecast at 7.7% vs. 7.6% previously in January. Eurozone December Private loans is forecast at 6.5% vs. 7.1%.

Japanese Yen (JPY)

The Japanese Yen (JPY) was sold across the board as risk sentiment improved and the market bought up high yielding currencies. USD/JPY jumped above 90 as Equities rallied into the US session and extended gains after the FOMC minutes. Overall the USDJPY traded with a low of 88.91 and a high of 90.76 before closing the day around 89.20 in the New York session. UPDATE Japan Retail Sales dropped -2.7% vs. -1.6% forecast.

Pound Sterling (GBP)

The Sterling (GBP) pushed higher after tripping stops above 1.4250. The market was very bullish and tested supply at 1.4350 that held until the late USD forced some profit taking. Overall the GDP/USD traded with a low of 1.4128 and a high of 1.4374 before closing the day at 1.4240 in the New York session. Looking Ahead, January House Prices are forecast to fall -1.7% vs. -2.5% previously, expecting a -16.7% Y/Y drop.

Australian Dollar (AUD)

The Australian Dollar (AUD) tracked the Euro higher in a move that has recently seen the AUD dubbed the ‘fast Euro’. Selling interest above 0.6700 proved strong headwind the pair slumped back to low 0.66 after the FOMC statement. AUD/NZD jumped higher to 1.27 as the market Dumped the NZD after the RBNZ cut rates by 1.5% in early Asian trading. Overall the AUD/USD traded with a low of 0.6597 and a high of 0.6730 before closing the US session at 0.6660.

Gold

Gold (XAU) paused at the $900 an ounce level while the market continued to consolidate the recent rally. Overall trading with a low of USD$883 and high of USD$903 before ending the New York session at USD$888 an ounce.

Technical Analysis: USD Gained Strength

Euro (EUR)

Euro – 1.3175 : Initial support at 1.3103 (Jan 27 low) followed by 1.2862 (Jan 26 low). Initial resistance is now located at 1.3330 (Jan 27 high) at followed by 1.3386 (Jan 19 high)

Yen (JPY)

Yen – 90.25 : Initial support is located at 87.99 (Jan 23 low) followed by 87.13 (Projected downside target). Initial resistance is now at 90.76 (Jan 28 high) followed by 90.97 (Jan 20 high).

Pound Sterling (GBP)

Pound – 1.4268 : Initial support at 1.3929 (Jan 27 low) followed by 1.3549 (Jan 26 low). Initial resistance is now at 1.4443 (Jan 20 high) followed by 1.4909 (Jan 19 high).

Australian Dollar (AUD)

Australian Dollar – 0.6670 : Initial support at 0.6495 (Jan 26 low) followed by the 0.6418 (Jan 23 low). Initial resistance is now at 0.6732 (Jan 28 high) followed by 0.6844 (Jan 19 high).

Gold (XAU)

Gold – 888 : Initial support at 852.90 (Jan 23 low) followed by 844 (Jan 22 low). Initial resistance is now at 916.1 (Jan 26 high) followed by 930 (Oct 10 high).

The National Bureau of Statistics in China has reported that the consumer price index hit 7.1 percent in January from a year earlier, revealing the biggest rise in inflation since September 1996, further accelerating from December's 6.5 percent rise. In the midst of the worst snowstorms in 50-years, economists had expected a fast rise in China's inflation. Food prices rose 18 percent as blizzards halted transport and destroyed crops. The Chinese government now has the heavy task on reducing inflation without compromising the expansion and growth of the world's largest nation.

Consumer Price Index ''could easily reach 10 percent later this year, driven by severe overheating of the economy,'' wrote Charles Dumas, Lombard Street Research economist from London.

The rising Chinese Yuan is now considered by the People's Bank of China as the tool of choice in order to fight China's rising inflation rate. Zhou Xiaochuan, head of China's central bank has repeatedly stated that the Chinese Yuan will gradually reach a balanced level that will help bring an equilibrium to China's balance of international payments. Last year in 2007, the People's Bank of China raised interest rates six times, raised the bank's reserve requirement by ten times and finally another interest rate hike last month.

''We expect no immediate rate hikes from the PBoC as a reaction to today's CPI number,'' wrote Ting Lu, a Hong Kong-based economist with Merrill Lynch.
''However, policymakers are likely to permit fast [Chinese Yuan] appreciation to fight inflation after strong readings of export data,'' Lu said.

Merrill Lynch currency analysts forecast the Chinese Yuan will appreciate 9.6 percent in 2008, compared with 6.8 percent in 2007. Alongside China's fast economic growth and rising inflation, the US Federal Reserve's expansionary stance is also prompting the Chinese Yuan to rise. The People's Bank of China pays 1.31 percentage points more on its six-month bills than it earns on similar-maturity Treasuries after the Fed's five rate cuts since September. Six months ago, the spread was 2.2 percentage points in favor of U.S. debt.

In forex trading, the Chinese Yuan has risen 7 percent in the year 2007. So far in 2008, it has risen 1.9 percent to 7.1623 per US Dollar so far. The Chinese Yuan will be expected to rise further this year.

The US Dollar has fallen on the Friday trade after the release of weak economic data and the generally negative comments made by US Federal Reserve chairman, Ben Bernanke, the day before. The US Dollar fell as a closely observed consumer sentiment index fell to its lowest in 16 years. The US Dollar commenced the day on a weak note, due to Ben Bernanke's assessment of the US economy on Thursday. Bernanke told a Senate committee there were strong ''downside risks'' to US economic growth and that the Fed was ready to respond as necessary, a small hint that further interest rate cuts might happen in the near future.

''With house prices plummeting, employment falling, stock markets in turmoil and gasoline prices still above US$3 a gallon, it is little wonder consumers are unhappy,'' said Paul Ashworth, US economist at Capital Economics.

''But the extent of the decline this month suggests that a degree of panic has now set in -- this is bad, very bad,'' he said.

In forex trading, the US Dollar fell against the major currencies. Against the British Pound, it was at US$1.9612 from US$1.9682. The Euro traded at US$1.4683 at 10pm GMT after US$1.4637 late on Thursday in New York. The US Dollar traded at 107.72 Japanese Yen, down from 107.85 Yen on Thursday.

The Reserve Bank of Australia (RBA) has raised its inflation forecasts to its highest range while stating that economic growth will increase. This has come only a week after the RBA increased its interest rates to 6.5 percent, an eleven year high. Core Inflation will speed up to three percent by the end of this year, the RBA said in a quarterly policy statement released today. ''This is tough talking on the inflation front,'' said Michael Blythe, chief economist at Commonwealth Bank of Australia, the nation's second-largest lender by assets. ''Interest rates will go up in the early part of next year.'' The Australian economy is currently in its 16th year of economic growth and still going strong with a rise in jobs with rising incomes fueling consumption. The jobless rate is 4.3 percent, close to the lowest in 33 years, and business and household confidence are near record highs. The jobless rate is 4.3 percent, close to the lowest in 33 years, and business and household confidence are hitting near record highs. Global economic growth has ''remained strong,'' Australia's central bank said. ''It will remain important to keep a close watch on both domestic inflation risks and any further developments in international financial markets.''

In the foreign exchange, the Australian Dollar rose the most out of any currency on expectations of another interest rate rise by the end of this year. Against the U.S. Dollar, the Australian Dollar advanced to 84.87 U.S. cents in Sydney this afternoon compared to 84.68 U.S. cents before the statement. The currency traded at 100.16 Japanese Yen compared to last weeks 99.96 Yen. Australia's dollar hit an 18-year high of 88.71 cents on July 25 after the CPI rose 2.1 percent in the quarter from a year earlier, more than the central bank's May forecast of 1.75 percent.

The U.S. Dollar fell against the major currencies as U.S. payroll data showed that the unemployment rate had risen to its highest level in six months. The Labor Department revealed a rise of the unemployment rate to 4.6 percent in July compared to 4.5 percent in June. July added 92,000 jobs in July, way below the expected 135,000 jobs. In response, the U.S. Dollar fell dramatically as it suggests that problems in the U.S. housing market are spreading.

In forextrading, the Dollar fell 1 percent against the Euro to $1.3773 from $1.3636. Against the Japanese Yen it fell half a percent to 118.05 Yen from 118.63 Yen.

The Australian trade deficit for June is set to top $1 billion, as importers take advantage of the strong Australian Dollar to purchase cheaper imports. "Australia's long run of trade deficits is set to continue,'' CommSec chief economist Craig James said.''Given the disruptions to coal exports from Newcastle, overall exports are expected to have fallen by 3.5 per cent in June.'' Due to this, James' expectation is that this month will hit a deficit of $1.7 billion. Australia's monthly trade figures have been in deficit for over five years, despite the economy experiencing a once in a lifetime commodity boom. ''With more upside to the Australian dollar in coming months, we expect growth in the value of imports to remain relatively subdued,'' ANZ Bank international economist Dr Alex Joiner said. ''Volumes, on the other hand, should continue to pick up as Australian consumers and businesses take advantage of their increasing purchasing power.'' The downside is that the current account deficit would constantly generate precarious figures due to the insatiable demand of imports by Australian consumers.

The Australian Dollar traded at its lowest level in 7-weeks after the release of a government report revealing slow growth in retail sales in April, reducing speculation of an interest rate hike by the Reserve Bank of Australia. Bonds rose, thus prompting traders to bet the RBA would increase its 6.25 percent overnight cash rate. ''The Australian dollar sold off as the market was disappointed by the number,'' said Jonathan Cavanagh, a currency strategist at Westpac Banking Corp. in Sydney. ``This reinforces the market's view that interest rates won't be changing.''

In forex-trading, the Australian Dollar traded at 81.84 U.S. cents in comparison to 82.04 U.S. cents yesterday. In trading against the Japanese Yen, it was worth 99.47 in comparison to a previous trade of 99.67 Yen.

The Australian Dollar fell after a government report showed a slower than expected inflation rate, effectively reducing the chance of an interest rate rise by the Reserve Bank of Australia. This showcased the biggest fluctuation of any of the major currencies today and was the biggest fall in seven weeks for the local currency.''This puts a dint in the short-term strength of the Australian dollar,'' said Tobias Davis, senior currency dealer at Custom House Global Foreign Exchange in Sydney. ''With consumer prices like that, we will see the RBA hold in May.''

In the foreign-exchange, the Aussie Dollar fell as much as 0.8 percent to 82.57 U.S. cents. Before the report, the Dollar was worth 83.28 U.S. cents. In the past few weeks, the Australian Dollar has been experiencing 17 year highs due to previous interest rate hike speculation.

The Australian Dollar fell about a fifth of a cent after data released this morning showed weak building approvals, down by 1.9 percent in December. Weaker than expected data on retail sales was recently released for the same month has also removed any speculation of a possible interest rate rise when the Reserve Bank of Australia (RBA) meets this week. ''The data is all looking a little soft and that's going to weigh on the dollar,'' RBC Capital markets senior economist Su-Lin Ong said.''It decreases the chance that the RBA will move on interest rates indicating that the yield differential won't widen much further,'' she said.

In the forex-trading markets this morning, the Australian Dollar bought 77.44 U.S. cents. At midday after the release of the weak building approval figures, the Australian Dollar dropped to 77.32 U.S. cents, reaching a low of 77.23 U.S. cents.

Australian trade deficit has reached 1.04 billion U.S. Dollars or a 52 percent deficit on Thursday as the drought cripples exports and capital imported goods climbed in price. After the release the Australian Dollar showed weakness in the foreign exchange falling to a low of 77.21 U.S. cents. In the foreign exchange yesterday, the Aussie was quoted at 77.29 U.S. cents in comparison to the previous day's trade at 77.47 U.S. cents.

The Australian Dollar is currently under pressure after the release of 'moderate' inflation reports last week. This has helped reduce speculation that the Reserve Bank of Australia (RBA) will increase borrowing rates by another 25 basis points to a 10-year high of 6.5 percent. Last year, the RBA increased interest rates three times during May, August and November due to high rates of inflation, taking it to a six year high of 6.25 percent. Australia currently has the highest interest rate in the world.
Investors will need to wait a week or two for economic reports ahead of a Reserve Bank quarterly statement on monetary policy on February 12.