Dollar Traders Now Looking for 5.25% Rates (page 2 of 2)

The Eurozone economic calendar tomorrow is light, which means that EUR/USD traders will probably spend the day continuing to mull over today's US Federal Reserve rate decision.

British Pound

Although we saw weaker UK economic data today, hawkish comments from Bank of England Governor King helped limit losses in the British pound. Total business investment, which is not usually that significant given its infrequency, fell 0.9 percent in the fourth quarter. BoE Governor King however remains optimistic on growth and inflation.

Even though he doesn't think that consumer spending would return to the "heady days" of the past, he does believe that it is on path to return to the average growth of the past. Furthermore, he thinks that there is risk for inflation to overshoot the central bank's forecast, especially with oil prices now trading above $65 a barrel.

However, with the choice only between cutting rates or leaving it unchanged, the BoE is still on a clearly different path than the ECB. Tomorrow is an extremely busy day in the UK with GDP, current account, consumer credit, money supply, mortgage approvals and the CBI distributive trades report due for release. Most of the reports are expected to show improvements, which could be positive for the British pound.

Japanese Yen

Earlier gains in the Japanese Yen were erased as carry traders seeking more yield jump right back into the most popular carry trade of 2005. If a 4.50 percent interest spread was attractive, 4.75 percent will be even more so. Although fiscal year end repatriation still remains a predominant theme, with the US Federal Reserve meeting, carry is the bigger focus of the day.

The biggest story though is China, where news has surfaced that they had surpassed Japan as the world's largest holder of foreign exchange reserves. Official media reports are saying that China's reserves hit US$853.7 billion at the end of February, compared to Japan's US$850.1 billion.

To clarify, this is total reserves and not US reserves. It is estimated that China holds 70 to 80 percent of its reserves in dollars, which means that they have approximately $650 billion dollar denominated reserves. Japan on the other hand, is said to have over $800 billion in dollar reserves.