Dollar Weakens After OECD Recommends Fed Continues QE Program

USD

The dollar weakened on Wednesday after a report by the Organization for Economic Cooperation and Development, or OECD, recommended the Federal Reserve continue with its stimulus program, and warned that withdrawal: “may be difficult to manage and less smooth than desirable, possibly leading to sharp rises in bond yields and serious negative consequences for growth.” The greenback also fell after the OECD revised down its growth forecasts for the U.S to 1.9% in 2013 from 2.0% previously, as well as for the rest of the world, the growth figure of which fell to 3.1% from 3.4% in 2013. Wednesday's news made it seem less likely that the Fed would taper its QE, but commentary from Boston Fed's Rosengren, a voting member of the committee, helped propel the dollar higher again during the U.S session afterhe said that if data continued to improve ,the Fed might taper its QE in a few months’ time.


EUR

The euro gained on Wednesday after German CPI data showed an unexpected rise in inflation, which lessened the probabilities that the ECB will reduce interest rates further or initiate more easing measures. The figures for German CPI in May were 1.5% from 1.2% the previous year when an increase of only a basis point to 1.3% had been expected. The m/m rose by 0.4% from -0.5% previously, when a 0.2% increase had been forecast. The E.U Harmonized data showed an even greater rise of 1.7% y/y from 1.1% previously. Other data showed German unemployment remained at 6.9% as expected, although the change in unemployment showed a higher-than-expected 21k rise in May when 5k had been expected. Meanwhile, the eurozone Money Supply showed a rise of more than 3.0%. A report from the OECD revised down growth forecasts for the euro-zone to -0.6% in 2013 from -0.1% previously, although this didn't appear to impact the single currency which rebounded strongly.


GBP

The pound traded mixed on Wednesday, rising versus the dollar, but falling to with the euro and the yen. Data was rather poor, which may explain the sterling’s continued lackluster performance. Sales figures from the CBI were well below expectations, coming out at -11 instead of the 3 expected, from a figure of -1 the previous month. This continued to feed into existing fears about the underlying weakness in the U.K economy, after recent GDP data was picked apart by analysts who showed growth was not as a result of increased activity, but rather due to burgeoning inventories. After the OECD's depressing figures, the pound may have fallen further as risk appetite dropped like a rock. All but Japan and a few others had their growth forecasts revised down - with the eurozone lowered to -0.6% from 0.1% and the U.K. unchanged at 0.8% for 2013, but down to 1.5% from 1.6% in 2014. The OECD praised the government’s fiscal discipline, but saw headwinds arising from slowing demand in the crisis-hit euro-zone.


JPY

The yen rose on Wednesday, fuelled by safety flows after the release of growth figures from the OECD which revised a low forecast growth in the world economy, as well as China, the U.S and the Eurozone. Figures for Japan were actually revised up, no doubt reflecting the efforts of the Abe administration and the BoJ. Japan's GDP should grow by 1.6% in 2013 – revised up from 1.4% and 1.4% in 2014 (unchanged). Figures for China, Japan's largest trading neighbor were also revised down to 7.8% from 8.5% in 2013, whilst the IMF also revised down its own figures to 7.75% from 8.00%. In time this could weigh on the yen, as Japan is now heavily reliant on the Chinese economy. The other major theme for the yen is the current trend of weakness in the bond markets, which has started to raise speculation the BoJ may have to turn the taps on again to bring yields down. The 10-year benchmark government bond (JGBs) saw yields run up 7 basis points on Tuesday and 3 on Wednesday. A sale of 20-year JGBs on Tuesday showed a dramatic fall in demand to 2.53 times from 3.6 in April. Rising rates could force the BoJ to continue printing money in order to buy bonds and try to stabilize the market, although this would have the side-effect of further devaluing the yen.