Forex Trading

The US Dollar returned to a familiar pattern in overnight trading, falling in tandem with rising stock prices as the US bank rescue plan boosted risk appetite. The greenback notably deviated from this dynamic in New York hours when the plan was first revealed. Euro Zone Current Account and UK Consumer Price Index releases headline the calendar in the European session.

Key Overnight Developments

• Japan’s Finance Ministry Asked BOJ to Buy Corp Bonds, Say Meeting Minutes
• US Dollar Lower Overnight as Asian Stocks Rise on Geithner’s Bank Rescue Plan

Critical Levels



The Euro added as much as 0.5% while the British Pound added a full 1% against the US Dollar as the safe-haven currency declined in tandem with stock gains across Asian exchanges. The greenback had deviated from the inverse correlation with risk in US hours, rising along with stocks, but returned to form in the overnight session.

Asia Session Highlights



Minutes from the last meeting of the Bank of Japan revealed that the Finance Ministry asked the monetary policy body to “expand the scope” of its corporate bond purchase program to channel more liquidity to cash-starved firms and promote lending and investment. Policymakers worked out the details of the bond-buying scheme as well as agreed to extend currently running programs to purchase commercial paper and offer unlimited collateral-backed lending to the private sector. Some BOJ members expressed concern that firms may develop an over-reliance on the bank’s current liquidity-boosting measures and suggested that an “exit strategy” needs to be formulated.

The US Dollar shed as much as -0.3% in the overnight session as capital flowed out of the standby safe-haven bid and into risky assets. Asian stock exchanges extended the rally sparked on Wall St after US Treasury Secretary Geithner announced a $1 trillion scheme to rid banks of toxic assets. The MSCI Asia Pacific Index added 1.3%.

Euro Session: What to Expect



January’s Euro Zone Current Account reading is likely to see the deficit widen after showing a -7.3 billion euro shortfall in the previous month. Earlier this week, the trade balance portion of the metric printed worse than economists predicted, showing a -10.5 billion euro deficit versus -9.0 billion expected. Trading terms deteriorated -24.1% from a year earlier as the deepening global downturn dwarfed overseas demand for European products. Indeed, export volumes rose just 4.0% through 2008, the least in 5 years. The capital side of the Current Account equation is unlikely to offset losses from the trade component: the MSCI index of Euro Zone stock performance slipped -7.7% while the Euro shed -6.9% against other major currencies through January. Meanwhile, the external balance has been improving at an accelerating pace in the US: the bilateral trade gap with the European Union narrowed to just -$3.5 billion in December, the smallest monthly shortfall since September 2001 while the overall Current Account gap shrank to a 5-year low of -$132.8 billion. A widening deficit in the Euro area coupled with a contracting one across the Atlantic implies a net outflow of capital from the currency bloc and into the States, extending our medium-term expectations of EURUSD downside into the long-term outlook.

In the UK, anemic economic growth is set to bring inflation lower, with the Consumer Price Index expected to decline to just 2.6% in the year to February, the lowest in 11 months. Minutes from the last meeting of the Bank of England revealed that policymakers voted unanimously to cut interest rates by 50 basis points and begin quantitative easing, committing to spend 75 billion pounds to buy government bonds fearing that price growth may slip well below the 2% target rate this year. Economists forecast benchmark rates to remain at 0.50% through the first quarter of next year as inflation comes in at just 1% in 2009 and 1.6% in 2010.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Follows Familiar Pattern, Declines as Asian Stocks Rise on US Bank Plan (Euro Open)