FX round-up: Dollar relinquishes early gains

Date: Wednesday 25 Nov 2009

FX round-up: Dollar relinquishes early gains

The release of the minutes of the most recent meeting of the Federal Open Market Committee (FOMC) prompted the US dollar to give up most of the gains it had made earlier in the day.

The FOMC, responsible for setting US interest rates, said it expects economic growth in the US will be modest over the near term, while inflation will be lower than previously anticipated. The economic forecasts suggest that US interest rates will remain low for the foreseeable future, a situation that undermines the appeal of the dollar.

The dollar index, which measures the value of the greenback against a trade-weighted basket of currencies, closed little changed on the day at 75.09. The US currency was also little changed against the euro. The European single currency received a boost from better than expected German business confidence data. The Ifo Institute’s business climate index rose to 93.9 from 92 in October, the highest level since August last year and better than forecasts of around 92.5.

In London trading, sterling lost ground on the day Bank of England governor Mervyn King addressed the House of Commons Treasury Select Committee with his thoughts on the UK economy.

King said that the three-way split on the Monetary Policy Committee on the Bank's Quantitative Easing programme did not represent a lack of direction on the part of the committee, but rather it was indicative of the economy being at a turning point.

King added there was still considerable uncertainty about the economic outlook and that it would still take a long time for the level of output to return to more normal levels.

He also said a credible plan was needed for bringing down the ballooning UK budget deficit, but outlook for the economy will determine this.

Risk averse investors steered clear of the pound as concerns grew about the state of the banking industry. Ratings agency Standard & Poor's said that nearly all of the world's big banks are weakly capitalised, while there were also rumours that German regional lender, WestLandesbank, is struggling to secure funding. Britain's dependency on financial services makes it especially vulnerable to loss of confidence in the banking sector and this, in turn, affects sterling.

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