Markets Await FOMC

The dollar recovered its earlier losses against the sterling and euro by the US afternoon to hover around 2.03 and 1.38, respectively. In overnight trading, the greenback slipped toward record lows versus the euro at 1.3838 but pared its losses heading into Tuesday’s FOMC policy announcement. With the exception of the Fed rate decision tomorrow, the US economic calendar this week is light thus shifting the focus to the accompanying FOMC statement.

The Fed is largely anticipated to leave policy unchanged at 5.25% when it announces its decision tomorrow at 2:15 PM. The key point of focus will be the accompanying statement from the FOMC, in which we expect minor changes to acknowledge further slowdown in the housing market stemming from the continued unfolding of the subprime debacle. However, we believe any reference to the subprime market will assure markets that the issue will likely remain contained and have limited impact on global financial markets. We expect the Fed will maintain its bias against inflationary pressure, adding that it sees inflation moderating over time.

The trade-weighted dollar index remains under pressure, hovering around the psychologically key 80-level. It briefly fell below it last Friday following the weaker than expected non-farm payrolls number. We expect the greenback to trade on weak footing against the euro and sterling as fears of a credit crunch linger on traders’ psyches. It will be important to closely monitor performance of US equities, treasuries and oil this week given the dearth of US reports.