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Investors Await Federal Reserve Testimony

During trading on Tuesday, the euro gained against the United States dollar. This growth was fueled by the release of retail sales numbers in the United States. Disappointing gains in retail sales exaggerated the decline in the dollar. The greenback is currently standing at a seven-week low against a basket of other world currencies.

Analysts see the sell-off of the dollar as a sign that investors are repositioning in the wake of this week’s speech by the Federal Reserve Bank. The chairman of the United States Federal Reserve Bank, Ben Bernanke is expected to speak on Tuesday before congress.  Investors are expecting more dovish statements by the Bernanke. The chairman of the Fed is expected to give his semi-annual speech on Tuesday and Wednesday. Market analysts are eagerly waiting to see if he gives any hints about future actions by the Fed.

More Quantitative Easing?

Last month, the Federal Reserve Bank chose to continue Operation Twist. This fiscal measure was intended to prop up the economy by buying up $267 billion long-term bonds and selling off the same amount of short-term bonds. Earlier this month, the Fed released their minutes for June. This report showed that the Fed was not expecting to adopt any new fiscal easing measures. After massive market interventions in recent years, the Fed is adopting more of a wait-and-see mentality. Investors will be eagerly listening to Bernanke on Tuesday and Wednesday to gain insight into future market interventions.

With all of the speculation occurring around the greenback, the euro rose to $1.2314 against the United States dollar. It dropped from this high for the day to settle around $1.2292 by the end of the day. Meanwhile, the greenback also hit one-month lows versus the Japanese yen. After being closed for a holiday on Monday, markets in Tokyo reopened and started a sell-off of United States dollars. The yen would have appreciated further against the greenback, but rumors still persist about a potential market intervention by Japan’s central bank. The dollar was most recently trading at 78.90 yen.

Australian Dollar Rises

With the Chinese economy holding steady, the markets are seeing an increased appetite for risk in Asia and Australia. The Australian dollar managed to rise off of last week’s lows and hit 91.27 yen. Support for the Australian dollar came just minutes after the central bank in Australia stated that they were not planning on cutting interest rates. The central bank in Australia believes that the economy is doing better than they previously though it was.

Meanwhile, the euro rose a total of 0.3 percent to reach a total of 97.04 yen. The euro has enjoyed a recent rise against the greenback, but this gain will not be sustained for long. For Europe to sustain a rising economy, debt-stricken nations like Italy, Spain and Greece need to have access to bailout money. Although the Eurozone’s finance ministers recently issued a bailout plan, usage of the European Stability Mechanism has to be cleared with the Constitutional Court in Germany.

The biggest issue facing Europe is convincing Germany to give the green light to the bailout funds. Currently, the Constitutional Court is not going to judge on the case until September 12. Investors will not be able to know about any potential bailouts until after this date. The markets will be forced to put up a great deal of uncertainty over the next few months. In addition to generally disliking bailouts, some people in Germany actually believe that the bailout fund violates German law. Until this issue is resolved, the euro will not settle into a stable exchange rate.

New Zealand Dollar Rises

Colloquially, the New Zealand dollar is known as the kiwi. During trading on Monday, the kiwi rose against the United States dollar from a rate of US $79.95. Earlier in the day, the New Zealand dollar had been trading at US $79.77 per United States dollar.

Part of the rise in the kiwi can be attributed to speculation over Bernanke’s testimony on Tuesday and Wednesday. In addition, New Zealand is also enjoying its lowest rate of inflation for 13 years. In retaliation for the fall in inflation, the Reserve Bank of New Zealand decided to keep interest rates at very low levels. 

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