Tuesday, 26 Jan 2010

Dollar Strengthens Before U.S. Interest Rate Decision

The dollar continued to strengthen today as the EUR/USD fell to a price not seen since August of last year. Driving the dollar's move is a flight to safety as Chinese banking regulations threaten to stifle economic growth. The downgrade of Japanese sovereign debt and a potential budget freeze by the U.S. Federal Government also supported the greenback.

The EUR/USD fell to a daily low of 1.4041 as risk took center stage. The dollar was also higher against the pound after less than expected GDP results from Britain were released. The yen gained slightly on the dollar with the USD/JPY falling to the 89.68 level.

New banking regulation may force some Chinese lenders to increase the amount of reserves they hold, thereby slowing economic growth in the Chinese economy. The Chinese economy is one of the bright spots in the global economic recover. Any hindrance could shake a fragile global economy.

President Obama also is expected to present a plan that would freeze the budget of some branches of the federal government.

S&P put a warning out for Japanese debt, suggesting the nation's sovereign debt could be downgraded after prolonged economic weakness and the threat of deflation looming over the Japanese economy.

Tomorrow the market will be following the release of the FOMC interest rate decision and the accompanying rate statement. An adjustment to the Fed Funds rate is not expected, however, a change to the wording in the accompanying statement could be dollar positive. If the Fed signals the time is approaching to raise interest rates and end monetary policy easing tools, the EUR/USD could fall to its next support line of 1.3830.