Posted by Allison on 24 March 2009, 09:37

“That old Chestnut?” Once again the US FED steals the headlines for the month with no less than 2 interest rate cuts totalling 125bps bringing the US base rate down to 3% - now the 3rd lowest interest rates in the developed world after Switzerland and Japan. Forward predictions are for even more cuts in US interest rates as they try to deflect the direct effects of an overheated housing market.

LIBOR rates – the interest rates banks charge each other – seem to be back under control, which is great news for the global economy (and forex in particular) but now American policy makers are worried about the onset of a recession in the USA and they are continuing to slash rates in an attempt to stimulate growth and lower the value of the USD to overseas buyers.

As usual these cuts caused some interesting currency movements and developments in the forex world.
However, by this stage the forex markets are used to the FED's rate-cutting antics. The cuts, which totalled  1.25% were only a small surprise and the USD did not collapse as a result. Having said that the USD did fall against 12 of the 16 most traded currencies in January.

Against the CHF (Swiss Franc) the USD hit an all time low of 1.0814 before recovering slightly.

Against the JPY (Yen) the USD was down as low as 106.03 – it's deepest trough for 2 and a half years and with the overall fall for the month itself being the biggest in more than 4 years at 4.7%. That's quite some shift.

Some forecasters are predicting the the JPY will rise and hold to 98 per USD within six months. A level not seen since 1995. That would be a rise of approximately 8% from where we are now and it may prompt Japan to cut their interest rates too. Whether or not that actually comes to pass, the current situation is not very conducive to the JPY carry trade (where people borrow JPY to invest in higher-yielding currencies) which in turn is not particularly good for the global economy.

In contrast the measured declines for the USD, the EUR (Euro) held its ground quite well. Comments from the ECB mean that traders expect interest rate rises if the spectre of inflation should start to rear its ugly head. As such, EUR was quite steady against most currencies in January.

Volume of EUR should continue to increase over time as more countries join the single currency. This month saw Malta and Cyprus join, with the full conversion to EUR-only happening in February.

In China, consumer confidence weakened. Consumer lead consumption for 2007 made up the largest component of GDP growth since 2001. This would probably be more worrying if it weren't for the Olympics being staged in Beijing, as that will, doubtlessly, have a massive feel-good factor for most Chinese consumers. It will also mean a large volume of CNY (Yuan) being physically traded.

CNY moved to its strongest position against the USD since the revaluation in 2005.