Yen Slumps As Risk Appetite Returns,Global Stocks Might Gain

Forex outlook:

The dollar declined against most major currencies because Tuesday's Fed statement gave no indication of any near-term rate action, contrasting with central banks in Europe which have signaled rate rises this year. The Dollar is trading around the levels of 1.3800, around the levels of 119.65 against the Yen and around the levels of 2.0370 against the sterling.

The yen fell broadly on Wednesday after a Federal Reserve statement tempered fears about the impact of ongoing U.S. credit troubles on the broad economy, boosting stocks and other risky assets. Signs of a recovery in investor appetite for risk, underscored in rising stocks, weighed on the low-yielding yen, a favorite vehicle for financing purchases of higher-yielding currencies in carry trades.

In carry trades, investors borrow in low-interest-rate currencies such as the yen so they can invest in assets denominated in higher-yielding currencies such as the Australian dollar. "We've seen sharp losses in the yen because investors are more willing to take on more risk and are putting on more carry trades," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. "But the market remains very sensitive to any major credit news so the situation could change quickly," he added.

On Tuesday, the Fed left interest rates on hold at 5.25 percent, as expected, and acknowledged that financial markets have been volatile and credit conditions are becoming tighter for "some households and businesses." But it said in its statement that despite the increase in risks to growth, the U.S. economy was still likely to expand at a moderate pace in coming quarters. That sent stocks higher, U.S. government bonds down, and emerging market spreads tighter. U.S. equities also rose on Wednesday, led by a rally in technology stocks, with investors snapping up battered financial shares.

Gold: A weakened dollar and a surging stock market drove U.S. gold futures near a two-week high on Wednesday, and the precious metal was also boosted after the Federal Reserve said inflation is still its main concern. A major bullion dealer said that physical buying was robust as jewelers worldwide began stocking inventories for gold's high-demand season near the end of the year. "It's mostly the dollar, which has been pretty well correlated with gold recently," said one precious metals dealer in New York. Gold future contract is trading around the levels of 679.50$ per once.

Crude Oil: U.S. crude oil futures ended lower on Wednesday despite government inventory data showing crude stocks fell more than expected last week.Gasoline futures dipped after initially rising on a surprise stock drawdown and heating oil futures trimmed gains after surging on a smaller-than-expected stock build. "The bottom line is that despite the crude draw, we still have a lot of oil," said Mark Waggoner, president of Excel Futures in Huntington Beach, California. Crude Oil future contract is trading around the levels of 72.20$ per barrel. 

Pool position: