The US Federal Open Market Committee delivered a landmark decision by introducing a previously used policy tool dubbed “operation twist”. The Fed’s unconventional move will involve selling of maturing short-term Treasuries in exchange for an equivalent sum of longer-term Treasuries, but crucially, does not involve an expansion of existing schemes. The group also went further by raising US growth fears which will no doubt amplify concerns that the global economy could be heading towards another downturn.

Sterling

The Bank of England minutes conveyed a clear message in that inflation risks may have to be put to one side as UK growth looks set to falter. The International Monetary Fund has downgraded its UK GDP projections while the MPC now expects economic activity through to 2012 to be substantially lower.

US dollar

Stock markets are in sharp decline while the dollar has firmed sharply across the board which implies that focus is more towards avoiding another recession as opposed to boosting growth. The Fed’s accompanying statement painted a dismal outlook for the US economy which will also have amplified fears that the FOMC have not done enough to revive not only US growth, but improve global prospects too.

Euro

Greece agreed to more crippling austerity measures in order to qualify for its next €8 billion aid instalment. In order to appease lenders, Greece plans to cut pensions, increase taxes and lay off public sector employees which will no doubt have detrimental consequences for its economy. It is therefore no surprise to see the beleaguered common currency languishing back near seven-month lows against the US dollar and there could yet be more pain ahead.

Japanese yen

Any hopes Japanese authorities had of demand for the yen easing on improved global prospects were quickly dashed after the US FOMC not only failed to deliver more stimulus but went further by painting a worrying outlook for the US economy. Growth sensitive currencies continue to be sold in favour of the yen; a trend which has accelerated further in recent days after New Zealand’s central bank indicated rate cuts may be needed while a slowing Chinese manufacturing could weigh on regional growth.

Travelex Global Business Payments Malta, freephone: 80073322, www.travelex.com/mt/

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