Dollar under pressure after Fed decision

Dollar under pressure after Fed decision
By Peter Garnham and Neil Dennis
Copyright The Financial Times Limited 2007
Published: March 21 2007 11:07 | Last updated: March 21 2007 19:21


The dollar slipped after the Federal Reserve kept US interest rates on hold at 5.25 per cent on Wednesday.

The decision shocked nobody, but it was the statement that accompanied the announcement that sent the dollar lower as the central bank removed a reference to additional firming in US monetary policy.

“The Fed has dropped its tightening bias,” said Marc Chandler, foreign exchange strategist at Brown Brothers Harriman. “The Fed’s statement appears both less confident of the outlook [for the US economy] and less optimistic.”

The dollar fell 0.4 per cent to $1.3370 against the euro, 0.3 per cent to $1.9670 against the pound and 0.1 per cent to $1.2100 against the Swiss franc by mid-afternoon in New York.

However, the dollar was 0.2 per cent higher against the yen at Y117.50 as the Japanese currency lost ground as strategists played down the importance of comments made by Zhou Xiaochuan, governor of the People’s Bank of China.

It had risen sharply in the previous session, boosted by reports quoting Mr Zhou as saying that China would stop the accumulation of currency reserves. The yen benefited because it does not feature prominently in China’s $1,000bn foreign exchange reserves.

Adrian Foster at Dresdner Kleinwort in Beijing said Mr Zhou’s comments most probably signalled the creation of an investment management agency, which the PBoC signalled last month, to manage China’s reserves and capital inflows. He said it represented a “very savvy” move by China.

The reserves managed by the new institution, or the net capital inflow from future months that would have gone into PBoC’s reserves, would be off the central bank’s balance sheets and therefore not counted as reserve assets.

“In a world where politicians view central banks as agents of government but investment agencies more as free players in an open market, the US Treasury secretary and other US government members will, henceforth, find it harder to target China as a currency manipulator because the central bank’s reserves will be stable rather than rising,” Mr Foster said.

The yen fell 0.4 per cent to Y156.75 against the euro and 0.4 per cent to Y230.80 against sterling.

Analysts said the yen also came under pressure as positive performance from Asian stock markets eased fears over further unwinding of carry trades.

The yen benefited from the recent rise in risk aversion. As equity markets slid, investors liquidated carry trades, in which the purchase of riskier high-yielding assets is funded by selling low-yielding currencies.

But, as equity markets recovered, the yen has come under renewed pressure. On Wednesday, the Shanghai composite index posted a fresh all-time high.

“Superficially speaking, it would appear that the ‘carry crisis’ is over and done with,” said Teis Knuthsen, chief strategist at Danske Bank. “We continue to treat the current period as a financial correction rather than the beginning of a fundamental crisis.”

Sterling fell against the euro as the minutes from the Bank of England’s February monetary policy committee revealed one member unexpectedly voted for a rate cut this month.

Economists had expected two of the nine-member MPC to vote for a 25-basis-point rate increase, but David Blanchflower called for a quarter-point cut while the rest of the committee voted to keep rates at 5.25 per cent.

“The Bank of England has continued its recent trend of surprising the market,” said James Knightley at ING Financial Markets, , referring also to the surprise rate hike in January.

The pound fell 0.2 per cent against the euro to £0.6801.

“This outcome has clearly reduced the likelihood of a near-term rate hike,” Mr Knightley added: “But we still feel it is more likely than not.”