Dollar Trades Higher vs. EUR on Rate Outlook

The U.S dollar held near a 2-½ month high on the EUR and kept a firmer footing against the Japanese yen on Wednesday as the market waited to see if the U.S. Federal Reserve would give any signal on when Interest Rates might begin to rise.

The greenback was near a 1-week high against the Yen before reports forecast to show U.S. housing starts rebounded and consumer prices gained. Traders increased bets that the Fed will raise its policy rate by June as the Federal Open Market Committee (FOMC) began a 2 day rate-setting meeting.

The U.S dollar traded at $1.4542 per EUR from $1.4538 yesterday when it reached $1.4504, the strongest level since Oct. 2nd. The U.S. currency was at 89.58 yen from 89.61 yesterday after reaching 89.95, the strongest level since Dec. 7th.

Fed policy makers are expected to keep benchmark rates steady and retain the vast majority of the forward-looking portions of its statement on the economy due this afternoon. With data pointing to the upside in the U.S. economy, there is a growing speculation that there will be a change in rhetoric on monetary easing. Analysts said investors were keen to close short positions built up in the Dollar all year before 2009 book closings and that this may support the USD for the rest of the week and into next.

Yen Slips against the Majors

The Japanese Yen saw a bearish trading session yesterday, losing ground against most of its currency crosses. The JPY fell against the USD and closed at 88.20, while the EUR/JPY cross rose to around 132.85.

The yen was under pressure for the second straight day after the Bank of Japan said this week it would further ease monetary policy in order to combat a surging yen and dropping prices. The dollar fell to a 14-year low of 84.80 on Friday. Japanese officials then had mentioned intervention as a possibility in order to weaken the yen. But this week's action plans to offer about 10 trillion yen ($115.8 billion) in short-term loans to commercial banks to boost liquidity and maintaining the key interest rate at 0.10% could help weaken the yen without resorting to selling the currency. 

Has the Yen's Bullish Trend Reached its End?

The Yen underwent a trend reversal during last week's trading session. The Yen dropped against all the major currencies, including the Dollar, the Euro and the Pound. The Yen saw its sharpest slide against the Pound as the GBP/JPY pair rose by 600 pips and is currently trading around the 148.30 level.

The Yen's downtrend came as a result of the negative Japanese economic data which was published last week. The Preliminary Industrial Production report for October rose by 0.5%, failing to reach expectations for a 2.5% rise. In addition, the Japanese Capital Spending report, which measures the change in the total value of new capital expenditures made by businesses for this year's third quarter, dropped by 24.8%. This has shown that the Japanese economy has yet to recover from the recession, and that recovery may take longer than expected. Also last week, the Bank of Japan (BoJ) decided to leave Interest Rates at 0.10%, the lowest rates in the industrial world. This has also contributed to the weak Yen.

As for this week, a batch of data is expected from the Japanese economy. Nevertheless, traders are advised to follow the Core Machinery Orders report scheduled for Wednesday. This is a leading indicator of production, and if the end result will be negative as well, the Yen could be further weakened.