Dollar Rebounds as ECB Encourages lending

The dollar swung wildly against the euro Thursday, trading higher as the European Central Bank acted to encourage lending between banks, even as markets continued to absorb the Federal Reserve's rate cut to historic lows two days ago.

Meanwhile, the dollar rose sharply against the pound and the yen as a Japanese government official talked up the currency.
The 15-nation euro dropped to $1.4313 in late New York trading from $1.4349 late Wednesday. The euro peaked at $1.4719 in overnight trading, its highest point since late September, and dropped as low as $1.4182 in the afternoon -- a massive 5.4-cent swing.
The European Central Bank said it would increase the interest rate it charges banks to borrow from the ECB from a half percentage point above its benchmark refinancing rate to a whole point.

It also said it would lower the deposit rate -- the interest it pays to banks that deposit their money at the ECB -- from a half-point below the refinancing rate to a whole point below it, or 2 percent. The changes would take effect Jan. 21.
The changes mean the ECB is instituting a sort of tax on money banks have parked with it, said Benedikt Germanier, senior foreign exchange strategist for UBS AG in Stamford, Conn.
But the euro was coming off its highs even before the ECB action, he said. The move was "an incremental change in how the ECB deals with lenders, (giving) them more motivation to lend out cash." In this environment, with a very thin volume of trading, a few more sellers in the market prompted a huge price swing.

Meanwhile, the British pound sank to $1.5070 from $1.5476 late Wednesday, and hit its ninth record low against the euro in as many trading sessions at 0.9425 euro.
The dollar also rebounded to 89.42 Japanese yen from 87.96 yen.
The buck traded as low as 87.11 yen Wednesday, its weakest level since July 1995. The yen eased as the Japanese finance minister said he would "implement appropriate measures" regarding the yen's gains. The Bank of Japan began a two-day policy meeting on Thursday. It is expected to cut its current rate of 0.3 percent on Friday by at least half.

The government's statements may indicate possible intervention in the foreign exchange market to keep the yen weak, which the country's exporters depend on.
On Tuesday, the Federal Reserve slashed its federal funds rate target to between zero and 0.25 percent, down from 1 percent, a level that was already the lowest rate target in a half-century, and said it would take unprecedented moves in an effort to battle the financial crisis and deepening recession.

The Fed has now committed to increasing the money supply by expanding lending and injecting liquidity in efforts to make more credit available to consumers and businesses.
Lower interest rates can drive investors from a currency as they seek higher returns elsewhere.
In other New York currency trading, the dollar rose to 1.1997 Canadian dollars from 1.1987 late Wednesday, and slipped to 1.0754 Swiss francs from 1.0779.

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BoE Cuts Rates by 100bps As Expected

BoE Cuts Rates by 100bps As Expected But Signal More Action To Come As Credit Conditions Remain Difficult

The Bank of England cut their benchmark rate by 100 bps as was expected by economist bringing it to 2.00%. The Pound traded higher on the news reversing earlier losses as traders started to expect a more aggressive move given the dour fundamental data that has recently crossed the wires.


Talking Points
• Japanese Yen: Finds Support at 92.50
• Pound: BoE Cuts Rates By 100 bps
• Euro: Rate Decision Ahead
• US Dollar: Jabs Data On Tap

BoE Cuts Rates by 100bps As Expected But Signal More Action To Come As Credit Conditions Remain Difficult.

The Bank of England cut their benchmark rate by 100 bps as was expected by economist bringing it to 2.00%. The Pound traded higher on the news reversing earlier losses as traders started to expect a more aggressive move given the dour fundamental data that has recently crossed the wires. The release of the HBOS home price indicator showed that values drop another 2.6% in November which sent the pound below 1.4500 for the first time in over six years. Credit conditions remain tight which has kept the housing market from bottoming which has forced the central bank to take more measures to provide liquidity to the market.

The BoE in its post announcement remarks stated that its “unlikely that normal lending volume restored without action” as “money, credit market conditions extremely difficult”. The central bank said the consumer spending and business investment has stalled which has dragged the economy into a recession. The MPC expects inflation is likely top drop further with the possibility of it falling below its 2% target very likely. The comments signal that the central bank is not done taking action and more easing is very likely in the near-term which could lead the pound lower as markets digest the comments.

The Euro traded heavy in early trading falling to as low as 1.2549 before finding support. The Riksbank unexpected 175 bps rate cut led to the Euro dropping as speculation increased that the ECB would cut rates deeper than expected at today’s rate decision. The Swedish bank wasn’t scheduled to make a policy decision until December 17th and the preemptive move demonstrates how dire the circumstances are in Europe. The ECB is expected to cut rates by 50 bps at 12:45 GMT, but the possibility of a deeper cut has significantly increased. Indeed, the second reading of GDP for the third quarter remained at -0.2% confirming the region’s economy is in a technical recession and the lower revision of household consumption demonstrates the lack of confidence by the consumer. A more aggressive move could sink the Euro below support at 1.2330, the October 28th low with 1.2000 a possibility. However, if the central bank meets expectations and President Trichet demonstrates no intention to deviate from the MPC’s measured approach then we could see a bullish reaction with a break above 1.3000 a possibility.

The majority of the event risk for the dollar may hinge on the markets interpretation of the actions from the European central banks. The continued easing could brighten the outlook for the global economy sparking risk appetite and leading to dollar weakness. However, employment data may dampen demand for risk as jobless claims are expected to remain above 500,000 for the fourth week in a row. U.S. factory orders are expected to have fallen 4.5% in October adding to the evidence the frozen credit markets brought manufacturing activity to a halt. Despite the fundamental data headlines that GM and Chrysler are considering pre-arranged bankruptcy could have a major impact on risk appetite. The potential impact on the U.S. economy of two of the three major U.S. automakers falling into bankruptcy could send traders to the sidelines. However, the potential resolution to Detroit’s troubles could bring relief to traders, who dislike the unknown and spark bullish sentiment.

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*Although spreads may vary in volatile market conditions, they are tried to be kept within the usually limits.
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*A client-friendly trading environment, No re-quotes.
*Ability to place orders inside the spread
*Competing rates from multiple banks
*Spreads are variable and can move sharply
*Ideal for active or professional FX traders

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