U.S. Economy Stalls
The U.S. economy appears to be stalling once again, but the Federal Reserve's actions could still work their magic. FedEx's CEO Fred Smith noted that trade has slowed to levels seen during the last two economic downturns, as high unemployment and weaker manufacturing growth took its toll on the economy.
Luckily, the Federal Reserve's third round of quantitative easing (QE3) is expected to modestly improve things, according to HSBC Securities' Chief U.S. Economist Kevin Logan. While these effects on the economy may take some time to materialize, Mr. Logan believes home buyers will see lower interest rates, which could help spur consumer spending.
Due in part to this modest outlook, the U.S. dollar has fallen against six major currency pairs. The currency is down 3.18% against the euro, 2.39% against the Swiss franc, 2.42% against the British pound, 1.42% against the New Zealand dollar, 1.20% against the Canadian dollar and 1.13% against the Japanese yen this month.
SEE: 7 Ways To Position Yourself For Recovery
Eurozone Struggles but Agrees
The eurozone had a major breakthrough earlier this month after Germany's courts approved the terms of the European Financial Stability Mechanism (EFSM), but bearish economic data later during the month curbed the market's enthusiasm. The euro zone's composite PMI, which combines manufacturing and services surveys, fell to 45.9, which was below even the lowest forecasts.
Interestingly, Germany has remained relatively immune to the decline. The country's PMI manufacturing and services indices showed surprise upticks, which suggests that things are getting significantly worse in other eurozone countries such as Italy and Spain. Meanwhile, France has been experiencing strong declines in its business confidence.
The lackluster performance has led many traders to speculate that the ECB would cut interest rates in October. Economists expect a rate cut from 0.75% to a record low 0.5% in October, while Governing Council member Luc Coene reinforced the sentiment by saying that the ECB could cut its main interest rate and even put its deposit rate into negative territory.
Japan's Economy Takes a Break
Japanese exports fell for a third straight month in August, reaching its lowest point since February. While the 5.8% drop wasn't as bad as economists expected (-7.3%), the financial markets remain concerned that the country's gains from rebuilding efforts have come to an end, while the negative sentiment in the U.S. and eurozone isn't helping.
The Bank of Japan (BOJ) responded by unexpectedly boosting its asset buying and lending scheme by 10 trillion yen in late-September, warning that the economy's recovery could get delayed by six months. While the likelihood of further easing isn't very high, some analysts believe the central bank could ease again at the end of the year or early next year.
Britain Shows Signs of Recovery
Britain's economy has shown some signs of recovery, according to Bank of England Governor Mervyn King, although he warned that it would be a slow one. Mr. King suggested that the recovery could come as soon as next quarter, driven by the agreement in the eurozone. However, he cautioned that the recovery would take a long time and that it depends on how the rest of the world performs.
Despite the optimistic mood, the financial markets remain concerned about the country's widening budget deficit, which hit record levels in August. The weakening economy drove down corporate tax receipts, while boosting social benefit payments. While these results weren't necessarily unexpected, they do represent long-term issues that need to be resolved.Investopedia's Forex Outlook For October 2012: Upcoming Events To Watch
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