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Forex Flash: US dollar weakness extends modestly heading into FOMC - BTMU

FXstreet.com (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the US dollar has continued to weaken modestly in the Asian trading session, losing ground against the high yielding commodity linked currencies of the Australian and New Zealand dollars.

He adds that investor risk sentiment is gradually beginning to pick up again as global growth concerns ease in the near-term. Further, he feels that building expectations of further monetary stimulus from global central banks combined with tentative indications that the pace of fiscal austerity may be eased in the euro-zone to support growth are encouraging the pick up in risk seeking behaviour. In addition he feels that should commodity prices remain at lower levels after their declines earlier this month, it will help to ease the squeeze on real incomes supporting consumer spending as the year progresses, acting as an automatic stimulus when global growth slows.

Additionally, he sees that the ongoing decline in inflation pressures in the advanced economies which are struggling with subdued growth was clearly evident yesterday with the annual rate of the US PCE deflator declining to just 1.0% in March and German EU harmonised CPI rate declining sharply to just 1.1% in April. Hardman notes that the ongoing moderation in inflation pressures then serves to increase expectations that central banks will ease monetary policy further given the heightened risk that inflation will undershoot their targets.

Looking to the US, he adds that the loss of cyclical momentum for the US economy heading into Q2 and low inflation pressures are resulting in the US dollar giving back some of its gains recorded in Q1 as investors push back the timing of when the Fed is likely to begin tapering QE3 monthly purchases. The positive impact of more aggressive monetary stimulus from the BoJ was evident overnight by the release of the stronger than expected Japanese household spending report for March. The report revealed that real household spending on a seasonally adjusted basis increased by 2.0%M/M in March resulting in spending during Q1 being 4.1% higher than in Q4 2012.

He finishes by writing, “The improvement during Q1 was mainly driven by spending on luxury items. In addition, there was also a modest improvement in Japanese labour market conditions with unemployment declining by -170k in March which when combined with an even bigger drop in the labour force by -200k resulted in a 0.2 point drop in the unemployment rate to 4.1%. Both reports will reinforce confidence that the new Japanese government’s policies are proving successful which should weigh upon the yen.”

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