increase overdone given risks to financial system and growth
Further upward potential for the
euro is limited
financial market crisis escalated again at the beginning of the Easter week
when Bear Stearns had
to be rescued. Equity markets suffered heavy losses and credit spreads widened
again substantially, pushing the US dollar down to new lows. USD-JPY plummeted,
hitting a trough of below 96; levels last seen for a few months in 1995. EUR-USD
made significant gains and rose over 1.59 for a short time.
then, the dollar has managed to regain some ground, particularly against the
yen: during the
last 9 trading days, the exchange rate has been hovering around 100. The dollar
was probably boosted by the fact that equity markets, andin particular
financials strengthened slightly, following the quarterly reports of Lehmann, Goldman
Sachs and Morgan Stanley. The dollarâ€™s rebound could also have been triggered
to some extent by profit-taking before the long Easter weekend. One of the main
reasons, however, was probably the Fedâ€™s decision â€śonlyâ€ť to cut the Fed funds
rate by the amount originally expected (still 75 basis points) to 2.25%, and to
combat the liquidity problem in the money marketby other means.
first the dollar had made a significant recovery against the euro too. Shortly
before the holiday weekend, EUR-USD had gone up to around 1.54 again. On the
night of Easter Monday, however, the
market turned round again. The euro firmed to about 1.58. And it looks as
though the single currency will close the week at this level â€“ just below the
peak â€“ too.
spate of divergent macroeconomic data from the EMU and the US
is one reason for the sustained strength of the euro. US
consumer confidence plummeted again in March from 76.4 to 64.5. The
Case-Shiller home price index shows sustained declines in house prices; in
January, prices were almost 11% lower than a year earlier. In February, new
homes sales dropped to 590,000. Sales figures have only been lower in February
1995 and during the 1990/91 recession. What is more, durable goods orders also
declined markedly again by 1.7% in February, indicating, amongst other things,
weak investment in machinery and equipment.
to the paltry figures from the US,
European business climate data were unexpectedly positive. The German ifo
business climate index improved for the third consecutive month. The manufacturing,
wholesale and construction industries all recorded increases, and retail sales,
which had soared in February, held up quite well. But not only the German
figures were favourable; upbeat data also came from from France
Furthermore, accelerating inflation in Germany
indicates that EMU inflation could possibly rise again in March.
president Jean-Claude Trichet took the same line in testimony to the European
on Economic and Monetary Affairs, emphasizing the ECBâ€™s commitment to contain inflationary
pressures. According to Mr Trichetâ€™s comments, all that is required from the ECB
at the moment is to ensure that banks get the necessary liquidity (i.e. by
making central bank funds available at the refi rate). But Mr Trichet did not
show any willingness to ease the constraints in the financial sector, or to
ward off spillover effects into other economic sectors, by cutting interest
a backdrop of hawkish comments from the ECB, improved economic data and higher inflation
rates, interest rate cut expectations have been priced out for the euro area.
Going by Eonia swaps, markets have reduced their rate cut expectations by
around 35 basis points to about 40 basis points (within the next 9 months)
compared to the first half of March. Deposit rates rose even more sharply,
mainly because risk premiums have been pushed up further due to the financial market
turmoil and the impending end of the quarter. During the course of March,
Euribor rates in all maturity segments from to 12 months rose by over 35
points to well over 4.70%.
our view interest rate increases in the euro area are exaggerated. It is right
that macroeconomic data and ECB comments are making interest rate cuts unlikely
for the time being. However, we do not see any signs suggesting that the
outlook for the euro area has fundamentally improved. On the contrary, the
global economic environment and the situation in the financial markets appear much
more serious today than a month ago. The signs that the US
is in a recession are increasing. Moreover, the constraints in the financial
system have got worse. A month ago, no-one could have envisaged an institution
like Bear Stearns packing up completely.
latest European economic indicators are remarkably robust, but things could
change quickly. The production figures show a sharp increase in output, whereas
new orders have been levelling off since last autumn. The ifoâ€™s strength is
based solely on assessments of the current situation. By contrast, business
expectations are now predominantly negative. Rising energy prices and the
appreciation of the euro are additional burdens.
this environment, we see very little upward potential for EUR-USD from its
present level. In the short term, however, the situation is uncertain: next
weekâ€™s economic data will probably confirm the impression of divergent
macroeconomic developments in the US
and the eurozone, but are not likely to have a significant impact on the
markets after last weekâ€™s substantial interest and exchange rate adjustments.
report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and
its affiliated companies (together "BHF-BANK Group") solely for the
information of its clients. The information and opinions in this document are
based on sources believed to be reliable and acting in good faith, but no
representation or warranty, express or implied, is made by any member of the
BHF-BANK Group as to their accuracy, completeness or correctness. Opinions and
recommendations are given in good faith but without legal responsibility and
are subject to change without notice. The information does not constitute
advice or personal recommendation, for which the duty of suitability would be
owed, but may facilitate your own investment decision. Moreover, you should
seek your own advice as to the suitability of an investment matter mentioned
herein. Investors are reminded that the price of securities and the income from
them can go down as well as up and that the past performance of an investment
or a market is not necessarily indicative for future results. This document is
for information purposes only. Descriptions of any company or companies or
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document is not, and should not be construed as, an offer to sell or solicitation
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