Tuesday, April 26, 2011

Dollar Weaker Ahead of FOMC Statement

MarketPulse FX submits:

by Scott Boyd

The dollar continued its week-long slide against the euro just one day before the next Federal Open Market Committee statement and investors are strongly of the belief that the FOMC will maintain the current low interest rate policy capping the Federal Funds rate at just 0.25 percent.

A low interest rate tends to devalue a currency; this is because lower interest rates mean weaker yields for investors. As a result, investors will sell lower-yielding currencies for currencies providing higher returns and this is exactly what has been happening with the dollar. Looking ahead, the dollar sell-off will likely increase as the interest rate gap between the U.S. and other countries continues to widen with rate increases in Australia, Canada, and most recently the Eurozone, taking the shine off the greenback.

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