Dollar Easier Ahead Of FOMC

It's a down day for the dollar ahead of the Fed this afternoon. The dollar index is weaker by 0.4% with notable strength in the British pound and Swiss franc spearheading weakness against the dollar. The currency market is buzzing ahead of today's FOMC statement, which will confirm the completion of $1.75 trillion in mortgage backed securities and agency debt by the end of the first quarter. At this point there is no immediate need to expand, while any weakness in the spring housing season is likely to be the next catalyst for further government support. But the most likely catalyst for nearby direction for the dollar is likely to stem from whether more (or less) members start to back away from the use of the "extended period" phrase whose omnipresence defines a recession that is clearly easing. All it might take is further one-month bounce back employment report to leave the Fed feeling shackled to the mast, unable to reach the captain's wheel in a vessel that suddenly needs a change of direction.

U.S. Dollar – The dollar is taking it in the neck on Tuesday morning. Yet that's not to say that dealers are favoring an unchanged policy nor are they expecting with cast-iron conviction the Fed to maintain its use of the same phrase. Such expectations might underestimate the building strength of the U.S. recovery and would argue that the dollar should shoot higher if the Fed indeed shifted to a less certain monetary path ahead. The Fed doubtless wants to achieve this although its timing is uncertain at this stage. A rebound in the March employment reading could leave them looking in the rear-view mirror, wishing they'd been a little more diligent. But some of today's vulnerability is to be found in better perceptions for competing currencies.

British pound – A stretch in the lead for the opposition Conservative party as exhibited by up to date political opinion polls is making the swollen ranks of sterling shorts think twice on Tuesday. The pound initially lost ground after a draft European Commission proposal noted that the British government must do more to rein in its budget deficit. To be honest, this was like throwing a bucket of water into the ocean. The well-flagged £178 billion deficit equivalent to 12% of GDP is a known difficulty and we all know that without harsh measures, the loss of the sovereign credit rating will be a done deal. Dealers found to their chagrin that an overnight loss in the pound to $1.4978 was short-lived. Whether or not a firmer reading of housing prices in the year through January played any role in reversing today's decline is suspect, but the fact remains that the pound rebounded to where it stands at $1.5135. A DCLG house price survey showed U.K.