Fundamentals of the Forex Market September 10, 2012

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The dollar index fell to a 4-month low, weighed down by gains in euro, after ECB took measures to lower borrowing costs for Spain and Italy. Greece officially entered the 5th year of recession and now that the ECB has relieved pressure on the euro, the troika will get back to dealing with Greece, Spain and Italy which should be the focus this week until the big day arrives for Mr. Bernanke on the 13h

The dollar index, which measures the greenback against a basket of six currencies, fell by 1.1% to 80.182 from 81.089 in late North American trading Thursday.

The euro touched a near 4-month peak against the dollar, after a report showed a smaller-than expected rise in US non-farm payrolls in August, setting the stage for the Federal Reserve to pump additional money into sluggish economy.

ECB President Mario Draghi backed up his promise to do whatever it takes to preserve the euro, unveiling a new and potentially unlimited bond-buying program aimed at lowering painfully high borrowing costs for stressed member states.

The euro rallied to a 8-month high against the Swiss franc, trading at 1.2085 on mounting speculation that Swiss National Bank will raise the floor it imposed on the currency pair, although many players were skeptical any move was imminent. The euro is trading at 1.2789 down slightly in the Asian session.

Sterling hit a 3-1/2 month high versus the dollar; tracking gains in the euro against the dollar, after the European Central Bank unveiled plan to lower high euro zone borrowing costs. The Sterling was supported by a round of positive eco data, including an above expectations PMI release while the rest of Europe reported below forecast. The GBP is trading at 1.5994 after breaking through the 1.60 range on Friday.

Japan’s government could run out of money by the end of November, the finance minister warned, even after an emergency spending deferral to cope with opposition parties’ obstruction of an expenditure-enabling bill.

Jun Azumi warned the opposition that further delays could threaten the economy’s recovery from last year’s earthquake and that the unprecedented 5 trillion yen ($63.3bn) spending delay would give the government only limited breathing room.

On Monday morning Japanese eco data disappointed markets once again showing.  Japan posted a current account surplus of 625.4 billion yen in July, the Ministry of Finance said on Monday, down 40.6 percent on year. The headline figure blew away forecasts for a surplus of 485.6 billion yen and an annual decline of 52.0 percent. That follows the 433.3 billion yen surplus and the 19.6 percent annual contraction in June.

The trade balance came in at a deficit of 373.6 billion versus forecasts for a shortfall of 439.5 billion after posting a surplus of 112.0 billion in June.

Exports were down 7.4 percent on year to 5.118 trillion yen, accelerating from the 1.5 percent annual contraction in June. Imports collected 1.9 percent on year to 5.491 trillion yen after easing an annual 1.2 percent in the previous month.

The JPY continues to remain too strong damaging the economy, while the BoJ seems to do nothing.

Prime Minister Yoshihiko Noda has vowed to achieve 1 percent inflation in Japan within one year, as part of his pledges to become re-elected head of the ruling Democratic Party. Noda will draw up plans to beat deflation and revitalize the economy. He also aims to carry out reforms to achieve a society without nuclear power generation. The USD/JPY is trading at 78.23 on Monday.

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About: FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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