IMF Downgrades Send Currency Traders Running For The Hills

The US dollar recovered in the Asian session to trade at 85.98 as traders prepare for the release of the FOMC minutes due late in the day during the North American session. Market focus this morning remains the IMF report and comments on Tuesday. The yen was near a one-month high after the IMF slashed its global growth forecast, boosting demand for havens. The world economy will grow 3.8 percent next year, compared with a July forecast for 4 percent, after a 3.3 percent expansion this year, the Washington-based IMF said. U.S. growth is helping lead a worldwide acceleration that’s weaker than the fund predicted 2 1/2 months ago as the outlooks for the euro area, Brazil, Russia and Japan deteriorate. A Bloomberg report said that the outlook buttressed the case made by IMF Managing Director Christine Lagarde, who warned last week that officials need to act to prevent a prolonged period of sluggish growth, a trend she called the “New Mediocre.” Raising growth in emerging and advanced economies “must remain a priority,” the IMF report stated.  The US Dollar Index traded on a negative note and declined around 0.3 percent in the yesterday’s trade on the back of uneven labor markets in the last week refueled the debate of when US Federal Reserve will increase its interest rates. However, weak market sentiments which led to increase in demand for the low yielding currency, favorable economic data from the US along with IMF revising the growth outlook of the country at 2.2 percent in 2014 and 3.1 percent in 2015 cushioned sharp downside in the DX.

The Australian and New Zealand dollars tumbled after the HSBC report showed growth in services industries slowed in China. China is forecast to expand 7.4 percent this year and 7.1 percent next year, little changed from the fund’s forecasts in July. The AUD fell by 26 points after the RBA held rates and policy. This morning data showed that the AUD jobs were lower than expected while the downgrade of growth weighed down the Aussie which is trading at 0.8788. The kiwi followed suit and gave up 29 points to trade at 0.7801.

The Japanese yen is trading at 108.32 up by 18 points as the US dollar gained 21 points in the early session. The Japanese Yen appreciated around 0.7 percent yesterday as a result of rise in risk aversion in the market sentiments which led to increase in demand for the low yielding currency. Japan’s Current Account was at a surplus of 0.13 trillion Yen in August from an earlier surplus of 0.10 trillion Yen a month earlier.

In Asian trading the euro fell 40 points as traders worried that the IMF downgrade along with comments that the eurozone could reenter its recession. The euro is trading at 1.2629. Unfavorable economic data from the region coupled with weak market sentiments capped sharp upside movement in the currency. German Industrial Production declined by 4 percent in August as against a rise of 1.6 percent a month ago.