The Fed Prepares To Act On Gloomy Forecasts | IFCM India
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The Fed Prepares To Act On Gloomy Forecasts - 22.9.2011

US Dollar Stock markets fell under pressure after the Federal Reserve System said there are “significant downside risks” to the economic outlook. In a risk aversion move investors are seeking safety in US Treasury securities, lowering their yields. Yields on 10-year notes dropped yesterday to 1.86%. The dollar therefore was strongly supported and strengthened against its major counterparts sending the dollar index, which tracks the greenback against a set of six currencies, to a seven-month high above 78. The Fed said yesterday it will buy 400 billion dollars of bonds with maturities between 6 and 30 years through June, while selling an equal amount of debt maturing in three years or less. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said. The Fed also maintained its August pledge to hold the benchmark interest rate near zero through the middle of 2013 so long as unemployment stays high and the inflation outlook is “subdued.” The central bank’s target rate has been in a range of 0%-0.25% since December 2008. As for economic data, yesterday reports showed that sales in the secondary housing market rose more than anticipated in August. The 7.7% increase left purchases at a five-month high of 5.03 million annual rate, the National Association of Realtors reported. Euro The euro fell against the US dollar and the Japanese yen after the Fed’s announcement and on speculations that reports today may show signs of a slowdown in Europe. According to preliminary estimations, the euro zone industrial orders fell by a seasonally adjusted 1.2% in July, decelerating the annual pace to 10.5% from 11.1%. The single currency failed to find support despite Greek Prime Minister George Papandreou’s government said it will accelerate budget cuts, targeting civil servants’ wages and pensioners to keep emergency loans flowing and avoid default. Preliminary numbers also showed that Greece’s 2011 deficit through August widened by 22% to 18.9 billion euros, more than the target of 18.1 billion euros. Greece pledged to reduce its deficit to about 7.5% of gross domestic product this year from 10.5% in 2010. At the same time European Commission President Jose Barroso said that European authorities battling the debt crisis shouldn’t rule out issuing joint euro-area bonds and must develop integration tools to make that possible. “The commission believes we should look also at that option,” Barroso said, according to Bloomberg. “We are not saying it is immediately. This is a matter that must be discussed, but we should not exclude that option either.” The euro meanwhile is targeting its seven-month low against the dollar at 1.3495, falling today from 1.3600 to 1.3527. Canadian Dollar The Canadian dollar extended its three-day losses against the greenback as crude oil, Canada’s biggest export, and stocks tumbled after the Fed statement. Light Sweet Crude oil contracts for November delivery dropped to 84.20 dollars per barrel. The loonie fell versus the greenback as well on concerns economic growth in the world’s largest economy and Canada’s main trading partner is slowing, discouraging demand for riskier assets. The Canadian currency depreciated despite the CPI accelerated in August more that economists expected to 3.1% from 2.7%. Bank of Canada Governor Mark Carney also said that he may keep interest rates low beyond when full output is restored as the domestic recovery is closely tied to a weak US economy. The International Monetary Fund lowered Canada’s economic growth forecast to 2.1% for this year from 2.9%, citing weaker demand from the US and slower government spending. Finally, this morning the loonie dropped on expectations the nation’s retail sales fell in July by 0.3% after a 0.7% increase in June. Pair USD/CAD surged above parity, rising from 0.9804 on Monday to 1.0139 today.
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