Fed Statement Puts Caution on Investors

Posted June 25, 2010

During the trading session on Wednesday, investors hung tight, waiting on news from the Fed. By afternoon trading, the euro was gaining against the US dollar.


Federal Reserve

During the entire course of the trading session on Wednesday, investors seemed to sit on the sidelines as they waited for the United States Federal Reserve to issue statements. While the information out of the Federal Reserve was not expected to be particularly good or bad, investors were cautiously waiting for news about the US economy. Due to this expected announcement, many investors moved to the high road, selling off the euro for the US dollar's safety.

The Federal Reserve announcement was somewhat more cautious that some investors had hoped for. The view of the US economy seemed to be less idealistic and more cautious. However, the Federal Reserve did state that it would hold on to the record low interest rates currently set for the time period. Many investors had hoped that the Fed would offer some guideline as to when it was planning to change this interest rate, as that would be a sign that the economy was strengthening and less drastic measures were needed.

Because of the announcement, the US dollar fell against the euro. The news encouraged investors to move away from the low yielding US Dollar in favor of the more risky currencies currently available. Even as many investors were still concerned about the euro zone's financial sector, the profit margin options seemed to lure investors back.

The Federal Reserve's announcement provided information on several fronts. The officials stated that the short term lending interest rate could remain low until next year to help support the country's economic growth. Also, the US unemployment numbers were released. The Fed stated that unemployment rates are expected to stay high and inflation to remain low for some time. The goal of not changing the interest rate is to help the country's inflation rate to stay as close to zero as possible, including an "extended period."

By The Numbers

By the afternoon trading session the euro moved from US $1.2277 as of late Tuesday to US $1.2323. The euro moved from Y 110.98 to Y 110.83. The US dollar moved from Y 90.39 to Y 89.91 by late afternoon.  The US dollar moved from CHF 1.1068 to CHF 1.1031. The UK pound moved from US $1.4808 to US $1.4964.  The ICE Dollar Index which pairs the US dollar against a basket of other major currencies, moved the US dollar from 86.053 to 85.734.

Inflation in Europe

Also announced during the trading session on Wednesday was information regarding the euro zone's inflation risk. The European Central Bank President states that he does not see any risk of deflation within the euro zone now or in the near future. Jean Claude Trichet, European Central Bank President, stated that he does not believe that budget cuts would cause a drag on the euro zone's economic growth. He also stated that "As regards the economy the idea that austerity measures could trigger stagnation is incorrect."