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While you were sleeping: Waiting for the Fed

Tuesday 12th October 2010

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A holding pattern has been established and it's unlikely to be broken until the US Federal Reserve further signals its next move.

Fortunately, investors may not have to wait long. Chairman Ben Bernanke and several regional presidents of the US central bank are set to deliver speeches this week. In addition, the minutes from the last meeting of the Fed's policy committee will be released too.

Meantime, investors are choosing to sit on the sidelines.

In early afternoon trading in New York, the Dow Jones Industrial Average was up 0.15%, the Standard & Poor's 500 edged 0.21% higher and the Nasdaq tacked on 0.45%. Trading was thinned by the Columbus Day holiday.

It was the same in Europe. The Stoxx 600 gained 0.4% to 263.2 at the 4.30pm close in London as two stocks advanced for each one that declined.

National benchmark indexes climbed in 14 of the 18 western European markets. The UK’s FTSE 100 and Germany’s DAX increased 0.3%, while France’s CAC rose 0.1%.

"The market is clearly expecting quantitative easing," Richard Lacaille, global chief investment officer at State Street in London, told Reuters.

Not unexpectedly, trading on foreign exchange markets remained volatile as global finance chiefs failed to make much headway to ease tensions at meetings in Washington on the past weekend. They will get another chance at the pending Group of 20 meeting later this month.

Today though the US dollar edged higher. The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.22% to 77.40.

Earlier today the greenback dropped to 81.40 yen, down from Friday's lows of 81.71. Traders told Reuters bids quickly emerged, helping the dollar back to 81.70 yen and stirring talk the buying could be semi-official.

Over the weekend, finance chiefs failed to bridge differences that have been producing a cycle of competitive currency depreciation.

Exchange rates dominated the IMF’s annual meeting as world leaders differed over whose policies are the biggest threat to the world economy on concern countries are relying on cheap currencies to aid growth. China was accused of undervaluing the yuan, while low US interest rates were blamed by emerging markets for flooding them with capital.

"Overall, despite occasional (European) reference to a strong dollar policy, which increasing sounds anachronistic, there is little to suggest that the dollar's direction is anything but down," Steven Englander, Citigroup's director of global foreign exchange strategy, told Reuters.

Now the focus turns to Group of 20 talks in South Korea in coming weeks. Analysts at JPMorgan noted G-20 officials were set to meet three times in the next month, when the dissonance around currency policy is the highest in a decade.

"By mid-November, two operating principles should be clear: that the G-20 will not agree formally to guide FX markets, but that countries will be allowed to manage a dollar decline imposed by a renewed Fed easing cycle," they wrote in a note to clients, according to Reuters.

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