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Daily currency report

Overview

Sentiment in global equity, currency and bond markets became more upbeat after the US Federal Reserve decided to leave its monetary policy unchanged and gave no indication that the central bank was preparing to tighten policy. As a result, equity markets turned positive, even closing higher in Japan, where attention remains squarely focused. The move generated flows out of the US dollar and into the euro and pound sterling, despite the Moody’s downgrade that was made to Portuguese sovereign debt. Improved sentiment typically means that safe haven currencies such as the Swiss franc weaken, but in the run up to the Swiss National Bank MPC meeting, losses could be minimised.

Sterling

Sterling traded alongside developments in the euro/dollar, but the pound’s direction could be determined by economic data. Sterling starts trading near four-month lows against the euro after global market sentiment turned positive on the back of the Fed’s policy decision.

US dollar

Despite stronger growth and inflation data seen recently in the US, the Federal Open Market Committee decided in a unanimous vote to leave its monetary policy unchanged targeting a range of rates between 0.0 and 0.25 per cent. The FOMC also decided to leave its quantitative easing program in place until this June. In the communiqué that was released with the policy announcement, the Fed indicated that its ultra-loose monetary policy would be in place for an ‘extended period.’

Euro

The euro is holding up surprisingly well despite the downgrade that Moody’s gave to Portugal’s sovereign debt rating. Moody’s additionally put Portugal’s outlook for its sovereign debt on negative after downgrading its rating to four notches above junk status. Moody’s said the outlook for the country’s growth is weak and that its deficit reduction plan has risks. Portuguese banks could also be in need of further recapitalisation.

Japanese Yen

The Japanese yen continues to trade near record highs against the US dollar. The gains made against the US dollar are helping to support the currency against other major currency crosses. The unwinding of carry trade positions taken by speculative Japanese investors is said to be behind the yen’s move higher. The central bank continues to flood the banking system with money to prevent any sort of panic. The measures appear to be working as equity markets rallied after two days of heavy losses.

Travelex Global Business Payments Malta, freephone: 800 733 22, www.travelex.com/mt/

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