Forex news and analysis 18th Jan

USD

The dollar fell on Wednesday on optimism over the outcome of talks aimed at averting a Greek default and on news that the IMF was trying to enlarge its lending capacity. The IMF is likely to seek additional finance from BRICS countries and oil exporters, but whether they can secure it is debatable, also questionable whether such an increase in the funding could go ahead without U.S support and agreement of Congress – with such an agreement almost impossible. Other news showed the World Bank had cut global growth forecasts for 2012 to 2.5% from 3.4%, with U.S forecasts falling to 2.2% from 2.9%, however, this failed to dent risk appetite and the dollar continued to fall throughout the day. On the data front Producer Prices fell slightly by 0.1% in December confounding expectations of a 0.1% gain. Other data showed that Industrial Production fell by 0.4% versus expectations of 0.5% and a previous print of -0.3%.

EUR

The euro rose after news that the IMF wants to enlarge its lending facility to insulate the global economy from the effects of the financial crisis. It was further supported by comments from a Fitch senior executive saying that the agency do not expect Italy to default, although this was offset by rumours that the agency is considering a 2-notch downgrade of the country. Data from the World Bank which showed it had revised down growth forecasts for 2012 to -0.3% for the euro-zone versus 1.8% previous projections failed to dent investor appetite as riskier assets rose all day. Uncertainty remains after talks on the latest debt-swap deal in Greece fell apart after an agreement on the interest to be offered on the new bonds could not be agreed. Without a deal Greece could default sending the euro spiralling down lower. It was a light day on the data front although Euro-zone Construction Output increase to 0.2% in November versus the -2.5% of the previous month.

GBP

The pound rose as risk appetite was boosted by news that the IMF is seeking to enlarge its bailout fund to 'insulate' the global economy from another crisis. However, sterling failed to strengthen as much as the euro as it was supported by progress being made in talks between bond-holders and the Greek government over a proposed bond-swap to manage its repayments. In the U.K data showed a surprise rise of 1 basis point in the unemployment rate to 8.4%, this resulted in the rate making a new 17-year high and almost certainly increasing the likelihood the BOE will increase monetary easing in February. There was better news from the Claimant Count, however, which rose by 1,200 instead of the 7,000 expected showing the downturn in the labour market might be moderating. Average Weekly Earnings showed a drop in the rate of increase to 1.9% versus 2.0% expected.

JPY

The yen fell heavily after being hit hard by a combination of a rise in global risk appetite after the IMF announced they would be trying to increasing their funding pool and comments from the Finance Minister JenAzumi that warned the authorities would not hesitate to intervene to counter excessive speculation. These comments came after former currency czar EisukeSakakibara – recently said he did not believe that the government would intervene or take part in a coordinated G7 strike as happened after the earthquake last year. Azumi's comments may have been designed to counter this and  re-emphasise the willingness of officials to intervene if necessary and prevent further speculation. The Finance Minister also said that Japan would not try to emulate the Swiss who set a limit on the Franc because it would be impossible in the case of such a widespread currency as the yen.