Fed Will Allow Emergency Measures to Expire

Traders reported heavy sales of EUR/USD after the release of the Federal Open Market Committee on Wednesday. As expected rates will remain low and the Fed said it will allow many liquidity programs to expire on February 1st 2010. The Fed said that in light of improvements in the functioning of financial markets it will allow the Federal Reserve’s special liquidity facilities to expire on Feb 1st 2010. The programs affected are, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Fed also said it would work with central bank counterparts to end temporary liquidity swap arrangements by February 1st. The Fed will maintain rates at 0 to ¼% and said that economic conditions warrant keeping rates at record lows. The Fed statement also said that “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt.”

Market Reaction Muted

As of this writing markets have not had time to react to the Fed statement but prior to the release of the statement the dollar was holding steady against most major currencies. The statement contained little that was not expected so market reaction is likely to be muted. The dollar remained near a 2 ½ month high against the euro. The euro has been pressured by concerns about the health of the EU banking sector.

Aussie Declines on GDP Figures

The big news was the decline of the Australian dollar which fell after dismal GDP figures were released. Australian GDP grew by only 0.2% during the third quarter and expectations of the nation tightening monetary policies were dashed by dovish comments from Australia’s central bank. Tsutomu Soma of Okasan Securities stated, “Weaker-than-expected growth data as well as comments from a top central banker have curbed bullish views towards the Australian dollar a little. Players, including Japanese institutional and individual investors, sold the Aussie to trim long positions in Australian assets.”