Fed Says Economy is ‘Leveling Out’

Stocks extended recent gains and US Treasury prices declined affecting currency exchange rates. The Fed issued a positive but cautious statement saying that economic activity is ‘leveling out’ but that the economy is likely to remain weak ‘for a time.’ Kathy Lien of GFT Forex said, “The outcome of this decision is still much more dollar bullish.” Many analysts believe that last week’s trend will continue. Last Friday the US dollar rose on better than expected US employment data. Throughout the recession good economic news has pressured the dollar downward.

Fed to Extend Asset Purchase Progam

Some traders believe that the decision by the Fed to extend the asset purchase deadline indicates economic weakness and will cap dollar gains. Michael Woolfolk of Bank of New York-Mellon stated, “The Fed is not yet convinced that the economy is on solid ground,” and that Fed Chairman Bernanke “knows very well the risks associated with removing stimulus too quickly.” The Fed said it would extend by one month the program to purchase long-term government securities and will not increase the amount of the purchases.

Surprise Data From France and Germany

The euro to dollar exchange rate hit a one week high after Germany and France posted surprise data that indicated a return to growth. The greenback also felt pressure from the demand for higher yielding assets. After a weak performance in 2009 the Eurozone is expected to return to growth in 2010. The euro to dollar exchange rate was up 0.5% to $1.4270 and against the Japanese yen the euro gained 0.8% trading at $1.4270. The decision by the Fed to keep interest rates at their present levels stopped market speculation that the Fed will raise rates in the near future putting pressure on the dollar’s exchange rate. Kazuyuki Kato of Mizuho Trust & Banking stated, “The Fed move basically did not have enough impact to alter the market trend of funds flowing into riskier assets. The prospect that the Fed will keep rates low will likely be one factor causing dollar weakness in the long term.”