FX Research - FX Briefing - EUR-USD hits lowest level this year
FX Briefing 5
Â·Oil down, dollar
European economic indicators
growth forecast, warns of second-round effects
EUR-USD hits lowest level this year
week the euro dropped to 1.42 against the dollar, the lowest it has been this
year. The pound Sterling also remained under pressure: cable slipped to 1.755
for a time â€“ its lowest level since April
2006. The gloomy economic outlook is dragging the UK
currency down. The OECD, for instance, sees Britain
as the only G7 country which will slide into recession this year. The Bank of
England has not yet reacted to this threat, keeping interest rates on hold at
5%. It could cut interest rates in the coming months, however. The yen, on the
other hand, strengthened, rising to its highest level this year against the
dollar. This was probably due to the unwinding of carry trades in view of the
weak economic data and falling oil prices continued to weigh on the euro.
Hurricane Gustav spared
the oil rigs in the Gulf of Mexico,
causing the oil price to fall sharply at the beginning of
the week. Once again, cheaper oil went hand in hand with a more expensive
dollar. As the biggest oil importer, the US
should benefit most from cheaper oil. Moreover, due to the drop in prices,
commodities are becoming less attractive as an alternative investment. After
losing 39% of its value since the beginning of the year, a large hedge fund,
which had invested in commodity stocks and derivatives, was closed this week.
economic data from the eurozone continue to be weak. Retail sales fell in Germany
and the eurozone,
and Q2 eurozone GDP components confirmed that private consumption has weakened significantly
throughout the whole of the euro area: consumer spending has been stagnating since
the 4th quarter of 2007. Furthermore, there are
increasing signs that foreign demand is declining. German industrial new
orders, for instance, dropped in July for the eighth time in a row; for the
first time, orders from the non-eurozone area declined more sharply too.
were focused on the ECB press conference. Jean-Claude Trichet took a far less
hawkish tone, however, than Bundesbank president Axel Weber, who had shocked
markets the previous week by remarking that the ECB might have to consider
raising interest rates towards the end of the year. Mr Trichet, however,
insisted that the council had no bias.
European Central Bank has become much more cautious in its economic assessment:
although the council members regard the growth slowdown in the second and third
quarter as only temporary, the uncertainty surrounding this outlook is
particularly high in their view. Furthermore, there was no longer any mention
in the introductory remarks of fundamentals in the eurozone being sound. The ECB
lowered their growth projections accordingly: for this year, the experts are
now expecting a central growth rate of 1.4% only (after 1.8% previously), and
for 2009, they cut their forecast from 1.5% to 1.2%.
upside risks to price stability still prevail over the medium term, according
to JeanClaude Trichet,
he was confident that, after the last interest rate hike in July, eurozone
inflation would be back on target in the course of 2010. He emphasized that the
governing council remains strongly committed to preventing secondround effects.
from next February, the ECB is tightening lending rules for financial
institutions using riskier collateral. Mr Trichet pointed out, however, that
this was not a restrictive monetary policy measure, but rather a regular risk
adjustment. After the press conference, EUR-USD fell to fresh lows. Not many
data are due to be published next week. Mr Trichet is unlikely to say anything
different in his testimony to the European parliament on Wednesday. After
having plummeted in the last few days, EUR-USD could calm down to some extent.
However, there is still one important economic indicator outstanding this week â€“
labour market report is due to be released later today.
Angenendt +49 69 718-3648
Grabbe / Klaus NÃ¤fken
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