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By Andrew Wilkinson at IB

The recent heavy hint from the FOMC that it will likely step back into the mortgage and government bond markets as a buyer has left the dollar trading with a heavy heart. Riskier assets ranging from equities to the Australian dollar have subsequently risen on prospects for a broader economic recovery. One would think that the dollar’s fortunes would also improve on account of bolder stimulus, but for now the currency appears trapped in an uncomfortable state of purgatory. A dollar recovery seems doomed until after the Fed’s ink is dry.

U.S. Dollar – The picture for the dollar remains pretty clear at the start of the week. It remains broadly lower against other majors. You just have to take a look at how the dollar is pinned to the floor against the Japanese yen to get a better sense of the overall picture. The promise of additional stimulus in the United States highlights two things. First, additional spending through bond purchases is likely to allow investors to breathe a sigh of relief as economic growth picks up. That belies the demand for riskier assets based purely on the hope value and relief that the authorities will act further. Yet the FOMC’s heavy hint deepens the problem facing Japan whose export-oriented economy faces a prolonged wait to see the results of greater stimulus, but in the meantime faces increasing demand for its own currency. Such demand only creates a greater pressure on its domestic economy.

Japanese yen – The yen remains bid versus the dollar while it’s also marginally higher against the euro. For now traders appear wary of enraging the wrath of the central bank and the yen’s strength seems confined to between ¥84.25 and ¥84.00. Dealers seem to be acutely aware that one step too far might trigger a slew of intervention and no one wants to be the last one through the doorway ahead of a panic exit. The yen remains lower against the British pound today at ¥133.38. Japanese equity prices jumped overnight in response to a strong close on Wall Street on Friday.

Euro – German money supply figures for the past month came in sharply higher than was predicted although we pretty much know that the economy continues to revolve at a decent clip. The euro remains close to a five-month high versus the dollar although there remains a strong element of intermittent slippage as investors keep casting an eye back on to the health of peripheral financial systems. The glaring example in the market’s eye today is the expected report ahead of the weekend from Irish Finance Minister Brian Lenihan detailing the full cost of the state bailout of Anglo Irish Bank. Although the minister has already stated that the cost to the nation is “manageable” some are less sure. The latest total pledge of €22 billion announced by the government contrasts to an estimate by Standard & Poor’s of €35 billion, equal to a rather harrowing 20% of Ireland’s GDP. Still, the euro continues to shake off the jitters and seems destined to print $1.3500 this week. Currently the single currency stands at $1.3476.

British pound – With no fundamental data out today to shape the performance of the British pound, it continues to appreciate versus the dollar and stands at $1.5842, which is its strongest price since early August. Because we all know that growth is likely to slow and that job and spending cuts are on the near-horizon for the British economy, yet the pound continues to ascend, one is forced to conclude that the market is short of the unit and has only one way to go at present. The lack of fresh or worsening bad news set against a background of further potential asset purchases in the U.S. is currently a positive for the pound. The present conundrum, however, is why the pound is rallying in the face of the potential for the Bank of England to trace the Fed’s footsteps. Last week former policy maker Kate Barker threw cold water on the likelihood of further British stimulus measures. The pound today lost ground to a firmer euro which buys 85.08 pence.

Aussie dollar – The chart for the Aussie against the dollar looks curiously similar to that of the euro although somewhat more volatile. The RBA meets next week to decide whether or not to again raise interest rates from the current 4.5% with the market currently taking a 66% view that policy will be tightened. The Aussie today stands at 96.07 U.S. cents and remains ever-so close to a two-year high.

Canadian dollar – Canada’s Finance Minister Jim Flaherty speaking on national television over the weekend called the domestic economic recovery “fragile.” He admitted that the challenges facing the U.S. economy in turn requires a cautious approach to domestic policy-setting. Mr. Flaherty said he’s been encouraging municipalities and provinces to ensure the completion of infrastructure projects and other public stimulus, which can’t go on forever. The Canadian dollar has rise to 97.59 U.S. cents this morning.