The dollar rebounded from an all-time low versus other key currencies on Wednesday after the Federal Reserve yesterday cut the federal funds rate 50 basis points to 4.75% and the discount rate 50 basis points to 5.25%. Sterling fell against all 16 most-actively traded currencies after minutes of the Bank of England's last meeting showed BOE policy makers unanimously held interest rates at 5.75% and suggested inflation risks have 'probably receded.' The yen fell on a renewed risk appetite.
The EUR/USD continued rising to an all-time high after the Fed yesterday lowered interest rates more than forecast. A test of 1.40 is expected. If this resistance is broken, the pair will move to 1.42. There is support at 1.38.
Financial and Economic News and Comments
US & Canada
- US consumer price index (CPI) declined a more-than-expected 0.1% m/m in August and rose 2.0% y/y. Energy prices declined 3.2% m/m in August. Excluding food and energy, the core CPI rose 0.2% m/m in August, as expected. The core CPI rose 2.1% y/y. Inflation is still relatively high, around the Fed's comfort zone's upper 2% level; however, it is decelerating as indicated by the chart below. However, yesterday's Fed rate cut is likely to increase the risk of accelerating inflation, unless the US economy slows dramatically.
- US housing starts declined a more-than-expected 2.6% in August to a seasonally adjusted 1.331 million annual rate, after falling 6.9% in July to 1.367 million. Housing starts fell 19.1% y/y. August's decline was due to single-family homes, which fell 7.1% m/m, while multi-family starts increased 12.8% m/m in August. New building permits declined 5.9% m/m in August to 1.307 million units at an annual rate, slower than the consensus expected 1.350 million. Permits fell 24.5% y/y. Housing starts are the lowest since 1995. Housing inventory is still large and a recovery in home building is still not in sight.
- In a reversal of its previous policy, the Bank of England abandoned its opposition to emergency 3-month money auctions and loosened lending standards, a week after Governor Mervyn King said such steps would encourage 'risky behavior.' The BOE said the penalty rate will be 6.75% and the central bank will accept 'mortgage collateral' at the auction of £10 billion ($20 billion) in loans next week. This measure is being taken to 'alleviate the strains in longer-maturity money markets,' the BOE said.
- The Bank of Japan, as widely expected, left interest rates unchanged at 0.5% in its policy board meeting ended Wednesday. The decision was by an 8-1 vote, with Atsushi Mizuno the sole advocate for a rate increase for a third consecutive meeting. BOJ Governor Toshihiko Fukui told a press conference that Japan's low interest rates were responsible for creating an environment for yen carry trades. Fukui said the yen carry trades show how resources can be misallocated.