The market’s focus is back on the US dollar today ahead of tomorrow’s Federal Open Market Committee (FOMV) meeting.  The dollar has strengthened to multi-year highs against the major currencies during the past few months, based on an expectation that the Fed will be raising the short term interest rates by the middle of this year.  Higher interest rates attract more overseas investments, and this tends to appreciate the currency.

However, a stronger dollar could become a serious problem for the Fed.  It will lower the overseas earnings of large US multinational corporations and suppress their stock prices.  This will, in turn, lower capital investment and productivity at home.  Moreover, the stronger dollar will make US exports less attractive to foreign buyers. Meanwhile, cheap imports will displace high cost domestic producers and become a strong drag on the growth.

The FOMC will release its monetary policy statement tomorrow afternoon. If the Fed pushes back the timing of the rate increase, they would proactively mitigate the negative effects of a strong dollar on the economy. If there is any suggestion of that happening, then the dollar will weaken. This will invite many to accuse the Fed of devaluing its currency to protect the domestic interests, as currently practiced by other central banks.

This morning’s Durable Goods Orders report showed that the orders fell unexpectedly in December. The January Consumer Confidence reports will be released later this morning.

EUR-USD has grinded higher overnight, and it is trading above 1.1300 this morning.  That said, most analysts forecast the euro to weaken further as it adjusts to the ECB’s massive bond buying program announced last week, and as a newly elected Greek government tries to restructure its debt payments.

GBP-USD is trading close to 1.5200. However, the release of a disappointing 4th quarter Gross Domestic Product report – which showed that the growth has decelerated to 0.7 percent in the final quarter from 0.9 percent previously – may cap the pound from gaining further.

USD-CAD is setting new highs close to 1.2500 early this morning.  The Bank of Canada is expected to make another cut to the short term interest rate in March.

AUD-USD fell to a new 4-year low at 0.7858 overnight but managed to find some support this morning.  The Reserve Bank of Australia is expected to cut the short term interest rate next week.

Have a great day!