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Forex Blog - FX Briefing - Dollar rebounds sharply

FX Briefing 8 August 2008

Highlights

·        ECB admits that the economy is weakening

·        Q2 growth in eurozone and Japan set to be negative: recession could be looming

Dollar rebounds sharply
During the course of the week, the dollar strengthened against almost all major currencies. USD-JPY rose to nearly 110, whereas EUR-USD is now only around 1.51. The pound Sterling dropped by about 6 cents to 1.92. The Australian, New Zealand and Canadian currencies lost even more ground against the US dollar, as did the forint, zloty and the Czech koruna.

This had little to do with developments in the US itself: contrary to the fears of some market participants, the FOMC statement gave no indication of a hawkish bias. The movement was triggered by increasing concern about growth in the other industrialized countries and in emerging markets too. Despite the fact that prices are still rising sharply, interest rate cuts are no longer totally out of the question: the Australian central bank signaled an intention to do so, and the Czech central bank cut interest rates unexpectedly to 3.5%.

All the signs are indicating that economic growth in both the eurozone and Japan fell sharply in the second quarter. The relevant national data for both regions and Eurostat figures are due to be published next week. Furthermore, there is a strong possibility that the slowdown will continue in the third quarter, which could result in both regions falling into a recession (in the technical sense of two negative quarters).

In Japan, real GDP is expected to have fallen by about 0.5% quarter-on-quarter in Q2, mainly due to weak private consumption and negative net exports. Given that the index of coincident economic indicators has been below the critical level of 50 for four consecutive months in June, the government in Tokyo is now officially assuming that the country has “very probably entered a recession”.

In the eurozone, it looks as though Q2 2008 could be the first quarter with negative growth since the introduction of monetary union. Italy has been losing steam for some time, and the latest figures released this Friday showed that Italian Q2 GDP dropped by 0.3% quarter-onquarter. In Germany, which has recently been regarded as the main driver of growth in the eurozone, the picture could change even more drastically. We are now expecting real GDP to have plummeted by 0.7% quarter-on-quarter in Q2. If at the same time the Q1 growth rate is revised down somewhat, which we think is likely, the year-on-year growth rate might have fallen below potential. France and Spain will presumably have just managed to remain slightly above zero quarter- on-quarter. For the eurozone as a whole, we are expecting growth to have slowed to –0.2% quarter-on-quarter.

In the past months, the ECB had pointed out that there would be a negative technical reaction to the strong growth in the first quarter, which was caused by special factors. At last Thursday’s press conference, however, the central bank admitted that growth was slowing down more sharply and that this was not due to technical reasons alone. According to the ECB, weaker global demand, also in emerging markets, and high energy and commodity prices are the main factors dampening economic growth, and will continue to do so in the third quarter.

Given that the economic outlook has changed, raising interest rates in the eurozone is not likely
to be on the cards. We are expecting the ECB to revise its growth projections down further in September. In view of falling oil and commodity prices, its assessment of inflation development is not likely to be revised significantly. However, this assessment sees prices falling slightly at first, and then more markedly in the fourth quarter. If economic growth remains weak, there could even be scope for interest rate cuts towards the end of the year.

In our view, the interest rate gap between the US and the eurozone is set to narrow. This would probably help to strengthen the dollar, which has been weighed down heavily by the credit crisis and its consequences. This is not likely to be a straight-line process: the dollar’s sharp appreciation movement over the last few days is actually crying out for a correction, at least a temporary one. But at the moment, the impending release of European and Japanese growth data is weighing on the currencies concerned.

Stephan Rieke +49 69 718-4114

Economics Department
+49 69 718-3642
volkswirtschaft@bhf-bank.com
Foreign Exchange Trading
devisenhandel@bhf-bank.com
Jörg Isselmann
+49 69 718-2695
Matthias Grabbe / Klaus Näfken
+49 69 718-2688

 

<i>This 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 their securities mentioned herein are not intended to be complete, and this document is not, and should not be construed as, an offer to sell or solicitation of any offer to buy the securities mentioned in it. BHF-BANK Group and its officers and employees may have a long or short position or engage in transactions in any of the securities mentioned in this document, or in any related securities. This publication must not be distributed in the United States.

© 2007 BHF-BANK Aktiengesellschaft

All rights reserved. Please mention source when quoting from it.

 

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