US Dollar Falls vs. Euro After China Stimulus Plan
The U.S. dollar fell against the euro Monday as news of a large economic stimulus package from China made traders more willing to take on risk.
Initial optimism quickly faded, however, as U.S. stocks surrendered early gains on concerns that China's plan may not be enough to help avert a global recession, helping the safe-haven yen regain some strength versus the greenback.
China launched an economic stimulus package on Sunday worth nearly $600 billion in what could mark the start of a round of big spending or interest rate cuts to stave off a recession in many countries.
"There has been some renewed hope that since China is a key driver of global growth, that might lead to some recovery in market sentiment,'' said Samarjit Shankar, director for global strategy at The Bank of New York Mellon in Boston.
"(But) it remains to be seen how much is followed through, which sectors get the additional spending and most importantly, whether that translates into improved quarterly growth,'' he added. "The jury is still out.''
In midday New York trading, the euro roseagainst the dollar to below $1.28. It had jumped to an intraday high at $1.2927 as some analysts said the currency could be the main beneficiary of China's stimulus package.
Against the yen , the dollar gave up early gains and last traded down at above 97.9 yen, while the euro was down at above 125.1 yen.
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The ICE Futures U.S. dollar index, which tracks the greenback against a basket of six currencies, last traded down 0.1 percent at 85.822.
Growing speculation that the leaders of the Group of 20 nations will agree to make a concerted effort to shore up the global economy when they gather in Washington this weekend also injected some optimism into the market, analysts said.
Sentiment Remains Jittery
Currency markets remain jittery about a global recession, ensuring that any recovery in risk appetite remains tentative.
Countries around the world have been slashing interest rates to buffer their economies against the negative impact of the global downturn, while many nations are mulling fiscal measures to essentially spend their way out of recession.
Analysts said while the initiative from China was a step in the right direction, it was unlikely to provide an immediate fix to the struggling global economy.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said China, like many countries including the U.S., Japan, Germany and the UK, is supplementing its monetary accommodation with fiscal steps.
"This is important but medium- and long-term investors should not take the headline figures at face value,'' he said. ''Some parts of the program have already been announced, such as tax breaks for exporters and property developers. Other parts, like the spending for the reconstruction of Sichuan from the earthquake, will simply be front-loaded.''
Overall, analysts said major currency pairs remain trapped in ranges and the foreign exchange market will continue to eye developments in the equity market for direction.
"At this point, most of the trade in the currency market is very range-bound because on a macro basis, everybody is still trying to get some visibility into the next year,'' said Boris Schlossberg, director of currency research at GFT Forex in New York.