By: Hillel Fuld
The USD experienced a sharp decline on Wednesday as firmer equity and commodity rates caused a rise in demand for the euro and perceived riskier currencies, while traders awaited a significant decision from the Federal Reserve.
The decision at 1915 GMT is the primary focus of the day, with all eyes on the question of if the U.S. central bank will stand by its guarantee to maintain the Fed funds rate low for "an extended period" while the economy shows signs of exiting the recession.
Analysts stated that the dollar may stand against more selling pressure if an unchanged statement causes a further rise in stocks. "It is likely to be risk-positive if the Fed suggests rates will stay low but acknowledges that the economy is doing better. This would give a boost to equities and be negative for the dollar," said Naeem Wahid, currency strategist at Lloyds Banking Group.
Meanwhile, surveys revealing a larger-than-expected expansion in the euro zone and the UK services sectors egged on the view that the global economy is recovering. "The improvement in the services PMI data out of the euro zone and the UK has helped sustain the 'risk-on' sentiment," Wahid said.
The EUR saw some gains, however, on news that Fitch ratings agency downgraded Ireland's sovereign rating to 'AA-' from 'AA+' with a stable outlook. At 1226 GMT, the EUR was up 0.3 percent on the day against the USD at $1.4761 while the usd index .DXY fell 0.3 percent to 76.141. This brought the dollar back from a one-month high of 76.817 hit on Tuesday, with risk appetite increased by a more than 1 percent rise in European shares .FTEU3 and by oil prices CLc1 moving above $80 per barrel.
The JPY was also dented by the improvement in risk sentiment, with the euro EURJP up 0.9 percent at 134.10 JPY and the USD gained 0.5 percent to 90.84 yen. Among higher risk currencies, the AUD rose 0.5 percent to $0.9071 buoyed as gold prices hit a record high and erased an earlier fall on the back of an unexpected slide in Australian September retail sales.
Sterling increased 0.6 percent to $1.6512 even as doubtful investors await a UK policy decision on Thursday, which could increase asset purchases on the part of the Bank of England. DATA, FED EYED Before the Fed announcement, traders awaited data on U.S. private sectors jobs at 1315 GMT, considered a prelude to crucial non-farm payrolls on Friday, and a key U.S. services sector survey at 1500 GMT.
ECON Analysts stated that the upcoming data and events are likely to keep currency trading on the edge of its seat, especially since policy statements are also expected from the Bank of England and the European Central Bank on Thursday. Following a decrease in high-yielding currencies including the Aussie and euro in recent days, however, most believe any hint that Fed rates will remain low will prompt investors to take on riskier positions, which may push the dollar even lower.
"The Fed is unlikely to offer any hints into the timing of an exit strategy and eventual rate rises, which may help stocks to rise and consequently boost euro/dollar," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt. Still, analysts said barring a hawkish Fed and stellar U.S. payrolls, a big rise in the euro beyond the mid-$1.48 region was not expected given resistance building around that level. The 21-day moving average lay around $1.4843 while the 14-day moving average was around $1.4857.
The EUR rebounded from a one-month low around $1.4623 hit on Tuesday, after poor earnings results from European banks and European Commission estimates of bank losses had renewed anxiety over the sector's health.