Potential Fed Action Pressures U.S. Dollar

The U.S. Dollar finished lower Tuesday on concerns by traders that the Federal Reserve may decide to implement another round of quantitative easing following this week’s two-day policymaker meeting. The threat of another round of stimulus is causing traders to shy away from the dollar which is giving most major currencies a boost. 

Today’s trading action in the dollar suggests that the Federal Open Market Committee, or FOMC, may announce the expansion of its monetary easing program to maintain purchases of longer-maturity securities. This program, known as Operation Twist, is set to expire at the end of the year. It entails the selling of short-term securities and the buying of longer-maturity bonds. Its purpose is to keep pressure on longer-term interest rates.  

The reaction by the market isn’t as great as it has been in the past, a sign that perhaps investors are getting used to seeing fresh liquidity pumped into the market. This may be because of growing uncertainty over the U.S. fiscal cliff and its potential effect on the economy. 

Aside from the weaker U.S. Dollar, the Euro picked up strength today after the German ZEW economic indicator jumped unexpectedly. This drove up demand for higher risk assets. The index rose to 6.9 from a November reading of minus 15.7. This was above estimates for a minus 11.3 reading. Also indirectly affecting the EUR/USD was the news that UBS would begin charging negative rates o Swiss Franc deposits. 

The GBP/USD posted another gain on Tuesday after a Royal Institution of Chartered Surveyors gauge of house prices in the U.K. declined last month. Traders were looking for a reading of minus 5, but the index dropped from minus 9 from minus 7. Although this reading could mean the economy is weakening, investors opted to look at demand for higher risk assets as today’s key driving force. 

February Gold backed down after posting two-days of strong gains. Today’s inside day suggests impending volatility but first traders have to overcome the uncertainty that is sweeping the market. Oversold conditions may have influenced the market on Friday and Monday, but as the market nears another potential resistance area near $1720.00, investors have to decide whether to chase it higher. 

The weaker dollar may be providing a soft bid in the market today along with Washington’s inability to reach a compromise over the so-called “fiscal cliff”. Investors are nervous about what the outcome of the activity in the U.S. Capital which is helping to attract some light buying and short-covering. 

Crude oil traders held the market steady at the lower-end of its recent range while awaiting the rollover from the January to the February contract. Once again, the weaker dollar is not helping to drive the market higher, but is probably helping the market from plunging sharply lower. Longer-term traders are looking for guidance about the economy because of its affect on supply and demand, but so far they have decided to lean toward the cautious end of the spectrum.