RISING expectations of a cut in US interest rates next month, following the Federal Reserves' warning of a possible weakening in the US economy, have exerted further pressure on the US dollar.
Consequently, the Japanese yen strengthened to 117.49 against the greenback yesterday – the highest level seen since March 12 – from 118.56 on Tuesday. The euro, meanwhile, remained near its four-year high against the US dollar, quoted at US$1.1438 in early London trade against US$1.1289 the prior day.
The Australian dollar surged further to 0.6443 US cents before falling back to 0.6411 US cents in London trade, compared with 0.6424 US cents on Tuesday.
US interest rates had been left unchanged at 1.25% after the US Federal Open Market Committee (FOMC) met in Washington on Tuesday. The decision came as no surprise to financial markets.
“The Fed's decision to leave rates steady was well within market expectations but they've included a mention of a deflationary threat and that was pretty surprising,'' Nomura Securities forex section manager Takashi Toyahara was quoted by Reuters news agency as saying.
A further cut in US interest rates, which are already at a 42-year low, bodes ill for the US dollar as money managers are currently looking for higher-yield assets.
The global foreign exchange market has largely ignored US Treasury Secretary John Snow's continued support for a “strong dollar policy”.
In an interview with CNBC, Snow said a strong US dollar was in America's interest. And this would be achieved by working on the fundamentals of the US economy, he said.
But Snow's comments did not lend concrete support to the greenback because of lingering concerns over the economic health of the United States and the ballooning US trade deficit.
Higher interest rates in other parts of the world have somewhat attracted investment money away from the United States. And such capital flight from the US has compounded worries about the country's large trade deficit, which is largely financed by foreign money.
Australia's central bank decided yesterday to hold its interest rate at 4.75%.
And the European Central Bank's governing council is also expected to leave interest rates unchanged at 2.5%, as its members have indicated that a strong euro would not hinder the continent's economic recovery.
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