High volatility in the markets yesterday saw the USD gain significantly against a basket of currencies. Whilst the domestic data on consumer confidence and home sales  brought mixed messages it was the worsening debt crisis in Greece which seemed to contribute most to the Dollar’s dramatic surge. The Federal Reserve is holding its policy meeting today and most analysts believe the Federal Fund rate will remain unchanged with a slightly positive impact on the Dollar. A tone of “an extended period” for low rates is expected; particularly in view of the still fragile state of the economy and continuing high unemployment.

    The Euro weakened considerably in yesterday’s session after the S&P downgraded Greek debt to junk status and Portugal’s debt from A+ rating to A-. In Germany politicians showed indifference to their southern neighbour’s woes insisting on tough austerity measures as a condition for a bailout with no strict guarantees of any aide at all. There is doubt as to whether Greece can sustain more cuts as fresh strikes and protests break out daily in response to existing measures. All eyes are on this region currently as people wait to see if the toxic debt crisis will spread. 

    The pound dropped from 1.5460 to 1.5230 against the dollar as polls continue to show the three major parties sharing the vote almost a third each. With no clear outright leader there are predictions of a hung parliament, which has sent the pound sinking. A coalition government is currently being seen as too weak to bring in the necessary measures to control the country’s debt problem. In addition, weaker than expected housing data  reinforced the view a recovery is stalling.

    The Yen held it’s own during a volatile day, strengthening against both the Dollar and the Euro during trading. The USD/JPY fell to a low of 92.82 on the back of reports that the Bank of Japan will raise its core CPI forecast during its semi-annual economic forecast on Friday up to a 0.3% rise compared to a 0.1% decline last month. Recent better than expected retail sales are showing signs the economy is slightly healthier than thought. The Yen further gained after a drop in equities when the Shanghai Index hit a 7-month low amidst fears of a credit squeeze in China.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst