The Fed has lowered the benchmark interest rate to 3% in an attempt to prevent the U.S. economy from falling into a recession. The benchmark interest rate in Mexico is currently 7.5%.

The differences in interest rates have increased the flow of foreign investment, with the Mexican currency rising for the third day in a row. It’s gain so far for this week stands at 0.6%.

Mexico has predicted growth for the country will slow to 2.8%, down from the 3.2% that was estimated in 2007 due to its largest trading partner sitting on the edge of a recession.

Forex investors have already priced in a 50 basis point cut to the value of the USD. Investors expect a 50 basis point cut will see an increase in the value of gold, while a lesser rate cut could see a correction in the price of precious metals.

With economic data today pointing towards a slowing economy with growth in private sector unemployment, there is concern that the 50 basis point cut stock market investors are hoping for may not happen.

While a falling stock market has been proven to consistently boost the value of gold, the precious metal could find itself under pressure as investors and funds are forced to close profitable positions to cover losses elsewhere.

Silver hit a 27 year high yesterday at $16.79 per ounce, with some investors cashing in on profits.

It is expected the Fed will announce its interest rate decision around 7:15 pm GMT.

The latest release of minutes from the Federal Open Market Committee meeting (FOMC) revealed that Fed officials are uncertain about the future interest rate direction and are concerned about short term inflation.

Forex Investors reacted to the release of minutes from the FOMC by continuing to reduce their USD holdings, this saw the Euro rise to a high of 1.2650 USD overnight from 1.2590.

The minutes were consistent with the Fed chairman’s Ben Bernanke’s testimony to Congress over the past two days in which he suggested that a pause in rate hikes would be a possibility if economic data continues to point towards slower growth.

Forex Investors holding USD also found little comfort in the recent Philadelphia Federal survey for July which fell to 6.0 index points, well below market expectations of 12.0 index points.

In upcoming events for next couple of weeks, the Federal Beige Book summary of economic conditions will be closely watched as will the next durable goods orders data and the next release of gross domestic product (GDP).

After seven consecutive sessions of gains in the dollar against the Euro, traders trimmed their positions after the Consumer Price Index data cemented the chances of a June Fed rate hike but shed little light on policy moves beyond that.

“The June rate hike was already priced in by the market,” said Marc Chandler, head of global currency strategy with Brown Brothers Harriman in New York.

“Although there’s a slight bias in the market towards another rate hike in August, the May CPI data doesn’t really help us judge what the Fed will do that far out,” he added.

“Short-term players were long dollars going into the data and got squeezed a bit,” said a currency trader with an asset management firm in New York.

The “core” consumer price index, excluding food and energy prices, rose a greater-than-expected 0.3 percent and the annual rate edged up to 2.4 percent, exceeding the upper threshold of what some Fed officials consider acceptable.

Growing expectations that the Fed will raise rates this month and possibly beyond, as well as a diminished appetite for risk, have boosted the U.S. currency this week.

Futures market have fully priced in a quarter percentage point rate hike by the Fed on June 29, the 17th such increase in two years. Traders will now look to the potential for the Fed to raise rates once again at its August meeting.

“The issue now is after June,” Greg Anderson, senior foreign exchange strategist with ABN-AMRO Bank in Chicago, said. “To be fair, the Fed doesn’t know and we don’t know. It will depend on the data,” he said.

Markets are expecting further euro zone rate hikes after the European Central Bank raised rates by 25 basis points to 2.75 percent last week, but investors have scaled back their expectations for the pace of tightening after comments by ECB President Jean-Claude Trichet following the meeting.

Fed officials including Chairman Ben Bernanke have made clear their concerns about inflation risks in the past week, cementing expectations for overnight rates to rise at the Fed’s next policy meeting on June 28-29.

SOURCE: Reuters

JON’S COMMENTS:
Well, I really thought that this news should have given the US Dollar a bit more of a break although I had a bearish view on it and knew this rally should remain fairly short lived. It really turned around quicker than I expected today so let see how it plays up in the coming days/week. My bearish dollar sentiment is surely reinforced here.

Forex traders will admittedly be watching economic indicators closely for insight into the Fed’s likely course of action. This includes data on the housing market, for the Fed could conceivably continue to raise rates as long as the housing market remains overly buoyant.

Goldseek reports:

The economy grew 4.8% in the first quarter of this year. Inflation is at the upper end of the Fed’s comfort level. If we see another two months of that type of environment, it is likely they will raise rates yet again…

In this vein, Ben Bernanke’s hint that the Fed might end its cycle earlier than expected probably hastened the dollar’s decline.In this vein, Ben Bernanke’s hint that the Fed might end its cycle earlier than expected probably hastened the dollar’s decline.