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Dollar under pressure, as market eyes Fed stimulus

Dollar under pressure, as market eyes Fed stimulus

The dollar hovered near multi month lows against higher yielding  currencies on Wednesday as markets bet the U.S. Federal Reserve would announce more stimulus later in the day. The euro was also buoyed following surprise strength in German economic sentiment, which contrasted with recent signs that concerns over the “fiscal cliff” are hurting U.S. economic confidence.

Many investors are expecting U.S. political leaders to eventually reach a deal to reduce the threat of automatic and aggressive fiscal tightening but there have been little concrete signs of progress in negotiations. The spectre of further easing in the United States is putting a fresh focus on higher-yielding currencies as the world’s four most liquid currencies — the dollar, the euro, the yen and the pound — all have near zero interest rates now.

The euro pulled away further from a two-week low around $1.2876 plumbed Friday and last stood at $1.3001, keeping gains after Tuesday’s surprisingly strong Germany’s ZEW economic sentiment index. Morale among German analysts and investors improved sharply in December, fanning hopes that Europe’s largest economy may avoid recession this winter despite all the grim news out of other parts of the region.

On the FX markets, GBP/USD has progressed in parallel with its EUR counterpart, with Middle-Eastern demand behind some of the early strength in the pair. Offers heading into 1.6100 helped keep a lid until the Wall Street open prompted further USD weakness, bringing GBP/USD to session highs of 1.6117. Nonetheless, the firmer EUR/GBP cross has kept the pair from moving too far from the 1.61 handle, however EUR/GBP has been prevented from breaking Friday’s high print of 0.8081. Focus for GBP turns to tomorrow’s Unemployment report from the UK ILO as the Olympic effect continues to wear off. 3M unemployment rate expected unchanged at 7.8%.

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