The Federal Open Market Committee (FOMC) decided on Tuesday to cut the federal funds rate by 50 basis points to 4.75%. Such decision was a surprise to the market since most analysts expected a 25 basis points interest rate cut. The American dollar tumbled against most of the currencies all around the world. Riskier investments, including the Polish Złoty, advanced.

We have not had such an interesting week in a long time. The recession on the US housing market and problems with high-risk mortgages caused the Federal Reserve System to make an aggressive move. Losening monetary policy helped the equities marktes and is expected to lift the housing market up. On the other hand, the Fed’s decision was a killer for the greenback. The US currency started losing ground even before Tuesday’s announcement since the market started discounting the 25 basis points interest rate cut. The decision to decrease the cost of money by 50 basis points caused  a massive sell-out of the USD. The EURUSD reached an all-time high on Friday morning at 1.4118 while it started the week at 1.3863 and is still in an upward trend.

Declinig risk aversion caused investors to seek more profitable investments. Poland, which is still considered an emerging market, was a perfect target. The Polish currency gained throughout the week against the American dollar and the euro. The EURPLN reached the week’s high on Monday at 3.7876 but declined to 3.7625 on Friday. The USDPLN experienced an even more dramataic drop. It tumbled from 2.7342 all the way to 2.6645 on Friday morning. Macroeconomic publications had no effect on the behavior of the Polish currency, which gained on increasing appetite for risky investments. It has be noted though that the Average Wage in Poland increased by 10.5% on a yearly basis against the forecasted 9.2% increase, announced the Polish government.

The Polish Złoty, since it is a free-floating currency, has never been so strong against the dollar. The main reason is of course the weakening of the greenback but also the prospect of Poland joining the European Monetary Union. The Złoty is expected to keep strenghtening till then.

Adam Narczewski