The dollar strengthened overnight after the Fed announced its much anticipated “operation twist” to help stimulate the US economy, with the USD hitting a seven month high versus other major currencies. Its decision to sell $400billion of short-term Treasuries and buy an equal amount of longer term debt was pretty much bang in line with what the market was expecting. This should help keep longer term borrowing costs lower and thus stimulate the economy. However, unlike previous quantitative easing initiatives, this operation does not directly increase the money supply and thus is not expected to have a negative impact on the dollar.

In its statement the Fed warned of significant risks to an already weak economy, with its poor outlook weighing on stocks. The spike in risk aversion sent investors into Treasuries as well as buying into the safe haven dollar. While the Fed’s latest initiative should help sentiment over the longer term, an overnight poll from Reuters showed that only 15% of Wall Street analysts felt that it would give the economy a boost.

Meanwhile, traders remain focused on debt troubled Greece amid lingering concerns that it could default. The euro zone economy should be the focus of attention this morning with the flash PMIs figure for September due for release. A weak set of numbers are anticipated, which could weigh further on the euro, particularly versus the dollar. A more dovish than expected tone to the minutes of the September Bank of England policy meeting is weighing on sterling. Indicating that a fresh round of quantitative easing could be on the cards, sterling fell to an eight month low versus the USD after the release, before falling further in overnight trade.