The dollar remains generally weak, hitting a fresh 16-month low against a basket of currencies in early morning trade as markets remain convinced that the Federal Reserve will keep its loose monetary policy, widening interest rate differentials in favour of higher-yielding currencies. According to Beige Book released last night (which will form the basis for discussion at the next FOMC meeting), the Fed believes that the US economy continued to improve over the past month on gains in manufacturing. However, firms are feeling the effects of higher energy and raw material costs. Labour market conditions were also reported as stronger but the tone was not sufficiently optimistic to believe that the Fed had changed its view.

In contrast the ECB is expected to tighten policy again this year, with comments from members of the central bank’s policy committee over recent days doing nothing to change this view. Hitting yearly highs of $1.4520 yesterday, the euro is expected to see further gains, though moves towards the $1.50 level could raise concerns about the impact of a strong currency on Europe’s export driven recovery. Meanwhile, the yen was broadly higher overnight as decline in Asian equities saw some traders cut yen short positions.

Hitting yearly lows of Stg0.8923 versus the euro yesterday, sterling remains under pressure versus the single currency, with the news of a better than expected UK labour market report for March doing little to provide support. The unemployment rate fell back but the GBP is still being affected by Tuesday’s release of a weaker than expected UK CPI report for March, which has dented talk of higher UK rates. Some gains were seen versus the USD overnight but upside is seen as limited.

Regards,

Tom Trevorrow
Account Manager
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