During today’s trading, USD/CAD briefly broke parity for the first time since April and the AUD/USD pair is nearing parity. The USD also declined to a record low versus the CHF today, as well as to a new 15 year low versus the Japanese yen. The recent negative sentiment regarding the greenback is due to bets the Federal Reserve will increase purchases of government debt, i.e. quantitative easing as soon as their next meeting in November. The release of today’s weaker than expected data only strengthened the case for further monetary easing.
The number of Americans filing first-time applications for unemployment benefits unexpectedly increased last week. Jobless claims rose by 13,000 to 462,000 in the week ended Oct. 9. This indicates that though the economy is not likely to go to a double dip recession, the recovery is much slower than hoped and will take longer to recover than anticipated. The prospect of a prolonged unemployment rate around 10% is one of the main reasons the Federal Reserve is considering extending monetary easing policies.
Further bad news came from the trade deficit numbers, which showed the deficit widened more than forecast in August. The deficit with China reached a record level for the month as imports climbed. Irritation in the U.S and Europe grows as China is restraining the Yuan to aid exports; friction over exchange-rate and trade policy dominated discussions at the IMF’s annual meeting in Washington this month.
Tomorrow Federal Reserve Chairman Ben Bernanke is expected to speak about the future of the monetary policy. The FOMC committee is currently divided on how to proceed with its monetary policy. While some expanding its asset purchases program, others feel that it may not have much effect on the unemployment levels in the long run. While it is very likely the Fed will indeed resume asset purchases in the near future, the biggest question is how much. The current expectation, in light of the dismal economic data being published recently, is for a substantial amount. However, considering the level of disagreement among the FOMC members, the numbers may prove to be much smaller than expected, which will ultimately give the USD a much needed boost.
