Daily Data Flow: U.S. Economy Shrinks; Fed Continues Stimulus;Dollar Hits Low against Euro

U.S. Economy Shrinks 0.1%, First Time in 3.5 Years (Yahoo Finance)
From October through December 2012, the U.S. economy experienced its first shrinking since the end of the recession. Responsible are the largest defense spending cut in 40 years, reduced exports and slow growth in company stockpiles. The decline occurred despite faster growth in consumer spending and business investment. “Frankly, this is the best-looking contraction in U.S. GDP you’ll ever see,” Paul Ashworth, an economist at Capital Economics, said. “The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging.”

Fed Keeps Stimulus Despite Signals of Weak Economy (CNBC)
Today the Federal Reserve, citing “paused” economic growth in recent months, announced it will continue its $85 billion monthly bond buying and holding interest rates close to zero as long as unemployment is above 6.5%. The decision, the result of a two-day meeting, was widely expected. “The report, noisy as it is, may help ease ideas that has surfaced earlier this month that the Fed may look to soon pull back from its asset purchases,” wrote Marc Chandler, chief currency strategist at Brown Brothers Harriman.

Fed Decision Slides Dollar to 14-Month Low against Euro (Reuters)
Due to the Fed announcement described above, the U.S. dollar has hit a 14-month low versus the euro. Loose monetary policy gives investors less incentive to buy and hold U.S. dollars, thereby contributing to its weakness. “So the mood of the market has not changed much at all. And certainly after the U.S. data this morning, particularly the GDP report, we can expect the Fed to continue with their very accommodative monetary policy, and that’s negative for the dollar,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.