subject: Factors Affecting the Key Forex Markets [print this page] Factors Affecting the Key Forex Markets Factors Affecting the Key Forex Markets
Whilst the dollar remains weak against the high-yielding and emerging market currencies, it has been looking stronger versus the euro and the yen after solid jobs data raised confidence in the US economy.
The US dollar soared after data showed that American employers added another 150,000 jobs in October 2010. That was far higher that analysts' expectations of an increase of 60,000. It also marks the fastest pace of hiring since April 2010.
The US employment report followed the Federal Reserve's decision to inject $600 billion into the flagging US recovery. According to spread betting company PipTrade, "This left some investors open to the possibility that the US dollar may have hit a bottom versus the euro and yen, despite the prospect of more monetary easing. Any signs that the US economy is gaining momentum might prompt CFD and spread betting investors to close out some of their short dollar bets."
The Federal Reserve's decision takes it into largely uncharted waters but it is aimed at lowering the cost of borrowing for both businesses and consumers in the aftermath of the worst economic crisis since the Great Depression.
During September and October, the dollar lost nearly 8% percent versus a basket of major currencies on expectations that more monetary easing would pressure US yields and lower the return on dollar-denominated assets.
Looking in more detail, the American central bank said it would buy about $75bn in longer-term Treasury bonds per month. It also said that it would regularly review the pace and size of the programme and adjust it accordingly. In the post-meeting statement, the Fed described the US economy as slow', and that inflation was somewhat low'.
In contrast, the Bank of England (BoE) said it would make no changes to its quantitative easing plan. Analysts had expected the BoE to follow the Fed.
The European Central Bank (ECB) announced that it would keep interest rates unchanged at 1%. ECB President Jean-Claude Trichet stated that the US central bank's actions did not suggest that America was actively seeking a weaker currency.
Whilst the $600bn injection was popular with the stock market, it wasn't well received everywhere. Policy makers in Asia and Latin America criticised the Fed's move, saying it made any significant deal on cutting global economic imbalances less likely. On top of this, China's State Administration of Foreign Exchange (SAFE) has announced new measures to curb capital inflows in response to US measures.
An advisor to the People's Bank of China also stated that it was absurd' that the dollar is still the world's reserve currency. That statement was backed up when Chinese credit rating agency Dagong downgraded the long-term US credit rating for the second time in six months. The rating was downgraded from AA to A+ with a negative outlook'.
Most forex headlines have concerned the dollar but according, to a CMC Markets report, there are other interesting currency influences at the moment, with the Euro coming under pressure due to debt problems in Portugal and Ireland. "Portuguese and Irish bonds continue to fall as concerns heighten over the ability of the two countries to turn around their economies" it read.
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