Dollar Weakens On QE Announcement

The dollar weakened on Wednesday after the Fed said it would buy 45bn dollars a month of treasury bonds at its FOMC rate-meeting. The news meant the central bank had decided to increase its programme of quantitative easing after the expiry of Operation Twist, as had been predicted. The injection of more money into the system, however, weakened the outlook for the dollar as a result of the effects of dilution. The programme of asset purchases would also include 40bn a month in mortgage-backed securities. The continued lack of improvement in the labour market was given as the rationale for reflating the economy and the FOMC said it would continue with QE as long as unemployment remained above 6.5%, or the inflation rate outlook for the next one-to-two years remained no higher than 2.5%.

EUR
The euro rose strongly on Wednesday as a result of follow-through buying after the release of Tuesday's positive sentiment data. Support also came from news that Italian benchmark bond borrowing costs fell to their lowest level at auction. The euro strengthened versus the dollar after expectations of further easing from the Fed ahead of the FOMC weighed on the greenback. It was up against the yen which was weighed by expectations of more easing as the elections look likely to usher in a new administration which is more prone to press the button on increasing QE. Data was not all that strong, with Industrial Production falling by -1.4% when it had been expected to show 0.0% change from -2.3% previously and German CPI coming out as expected at 1.9% with the EU harmonised figure only slightly below what was expected.

GBP
The pound strengthened on Wednesday after better-than-expected jobs data and the Fed announcement that it was increasing its balance sheet by 45bn of Treasury purchases and 40bn mortgage-backed security purchases a month. On the jobs front the figure for the number of new people claiming unemployment benefit actually fell by -3.0k when it had been expected to rise 7.0k in November. The Claimant Count also remained low, at 4.8% and the Unemployment Rate remained at 7.8%. Despite Weekly Earnings not rising at the 1.9% expected but at a reduced 1.7% rate instead, and the Employment Change rate over the last 3-months rising by a lower-that-expected 40k the data was received positively by markets and led to sterling driving higher during the day, with support later also coming from the FOMC's announcement of more QE which undermined the dollar.

JPY
The yen fell on Wednesday after increasing speculation that the opposition ADP party will win elections on Sunday and begin to implement their ultra-loose monetary agenda. Risk appetite overall also rose on Wednesday following a more positive outlook for Europe after Italian borrowing costs fell at auction despite recent political upheaval. The yen even fell to the dollar despite the doveish FOMC in which 85bn in monthly asset purchases was announced to help fight unemployment. On the data front, figures were positive, with Machine Orders y/y in October rising by 1.2% when they had been expected to fall by -5.0% although m/m they just fell short of the 3.0% analyst's had predicted, but did rise by 2.6% from -4.3%. The Tertiary Industry Index fell by -0.1% y/y when a deeper -0.4% had been estimated. The Domestic Corporate Goods Price Index m/m rose to 0.0% from -0.3% and to -0.9% y/y from -1.0%, nevertheless the positive data was not enough to support the yen which continued falling as the day progressed.