Friday August 15, 2008 - 13:48:10 GMT
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FX Briefing - Dollar rally continues
FX Briefing 15
Bank of England
softens its tone despite rising inflation
in the eurozone
and global growth worries push commodity prices down
Dollar rally continues
dollar continued to gain ground against almost all major currencies this week.
further to 1.4720. Cable fell a further 7 cents and by the end of the week was
only 1.86 â€“ a
21 month low. Since mid-July, the UK
currency has lost over 7% versus the dollar. During the course of the week, the
dollar firmed against the yen too, rising above 110.
all the major currencies, the pound Sterling lost the most ground. This week
alone, the UK
dropped by almost 3%, despite the news on Tuesday that the UK
inflation rate had rocketed from 3.8 to a new cycle high of 4.4%. In spite of
this, the Bank of Englandâ€™s latest inflation report, published the following
day, took a rather dovish tone, which surprised forex market players. Although
inflation rates are set to go up even further initially, the UK
central bank is expecting inflation to fall to below the 2% target in the next
two years as a result of weaker economic growth. The gloomy economic assessment
in the BoEâ€™s report has fuelled rate cut expectations once more. The market is
now expecting the next interest rate cut to take place as early as autumn.
we had already predicted last week, the weak economic data continued to weigh
on the euro this week too. In the second quarter, GDP fell by 0.2% for the
first time since the introduction of monetary
union. The large countries such as Germany,
and, surprisingly, France
posted even bigger declines. The GDP data published did not contain any major
surprises, but they did confirm that the eurozone has entered a period of economic
weakness is likely to continue, as the prospects for the third quarter do not
look any better, given that sentiment indicators and industrial new orders have
plummeted. Eurozone production figures also endorse this view. In the second quarter,
industrial production declined by 0.6% quarter-on-quarter, and the negative
overhang for the third quarter is just as high.
the ECB could, as early as November, have to face the fact that, after two
negative quarters, the eurozone has entered a technical recession. Interest
rate hike expectations have therefore now vanished completely from the market.
If the economic weakness persists, there is more likelihood of rate cut
expectations. We are expecting the ECB to react promptly, like the BoE, and to adopt
a much less hawkish stance at its next meetings, despite the high inflation
rates. We could envisage interest rate cuts towards winter.
dollar was also supported this week by US inflation data. CPI rose by 0.8% month-on-month,
twice as much as had been expected. The core rate also went up surprisingly
sharply by 0.3% month-on-month, pushing the annual rate to 2.5%, further above
the Fedâ€™s comfort zone. This is giving rise to expectations, that the Fed could
be forced to raise interest rates, despite the weak US
economy, in order to combat heightened inflation risks.
dollarâ€™s strength was also partly responsible for commodity prices falling
further this week.
the first time for eight months, gold dropped below $800 per ounce. In view of
increasing concern about global growth and the strong dollar, commodities are
becoming less attractive as an alternative investment.
week, the focus in the eurozone will be on the first sentiment indicators for
August. These are likely to be weaker across the board. As far as the US
is concerned, markets will be primarily interested in housing market data.
Angenendt +49 69 718-3648
Grabbe / Klaus NÃ¤fken
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