FX Blog - FX Briefing - Dollar defies bad news from the USA
FX Briefing 12
Â·US government places Fannie Mae and Freddie Mac under
Â·USD profits from
deleveraging and repatriation
Dollar defies bad news from the USA
US dollar was able to consolidate its position against almost all of the
important currencies this week. EUR/USD hit a twelve-month low and temporarily
slid to 1.3888, although most of the news was unfavourable for the USA:
weak labour market data, Fannie Mae and Freddie Mac nationalised, limitation of
oil production quotas, crisis at important US
investment bank. However, this news did not adversely affect the friendly trend
in the US dollar. It was not until
that EUR-USD corrected to just under 1.41 â€“ still more than one cent below last
since commodities prices went into reverse in mid-July, the dollar has
appreciated against all the other main currencies â€“ in particular against the
Australian and New
Zealand dollar, the Swedish
krona and the Norwegian krone, sterling and the euro. Least affected of all was
the Japanese yen, which benefited from rising risk awareness that prompted
investors to unwind their carry trades.
strength of the US
currency is mainly due to the fact that economic weakness has meanwhile spread
from the US
to the global economy. In its interim forecast, the EU Commission emphasizes the
risk of a technical recession for Germany
and the EMU, for example. However, the appreciation of the dollar is not
indicating brighter prospects for the US
economy â€“ this was impressively confirmed by the US
labour market data for August. The sharp rise in the unemployment rate from
5.7% to 6.1% was particularly shocking; the rate is now more than 1.7
percentage points up on the cyclical low of March 2007. This is dampening the
prospects for private consumption, the most important demand component in the USA.
Real consumption is expected to have fallen in the current quarter already, the
first decline since the fourth quarter of 1991.
view of the drop in oil prices by almost 30 % since mid-July, OPEC has cut its
production quotas by 520,000 barrels per day as it considers the international
oil market to be â€śoversuppliedâ€ť. Although this step did not come out of the
blue, many market participants had not expected the cut to materialise before
December. The OPEC decision stalled the oil price decline only briefly, the WTI
having fallen to just under USD 102 per barrel since then. Accordingly, the
decision only had a short-lived impact on the dollar, too.
the announcement that the two mortgage finance companies Fannie Mae und Freddie
would be placed under conservatorship was certainly bad news, it was
nevertheless welcomed by the equity markets, as the government intervention secures
the repayment of debt and guaranteed loans which in turn reduces systemic risks.
According to William Poole from the Federal Reserve Bank in St.
Louis, the burden on the US
budget could amount to as much as $300bn. For the time being, however, this
appeared to be the lesser evil for the global markets.
crisis on the financial markets was back in the headlines again when it emerged
increase by the investment bank Lehman Brothers might fail. Lehman Brothers
furthermore reported that its quarterly loss had risen to $4bn in Q3. The
uncertainty regarding the bankâ€™s future dampened the US dollar only
temporarily. The dollar actually appreciated afterwards, because more than
anything else this case illustrates the fragile state of the global financial
sector. But on Friday, the relief after the announcement of a possible buyer
finally put some pressure on the dollar.
the financial crisis had its origins in the United
States, it is now even
supporting the US dollar. Investors around the world are reducing risk
positions in the commodities, fixed-income and equity markets they had financed
with loans taken out in low-interest-rate currencies. Thanks to the Fedâ€™s
massive interest rate cuts, the US dollar is benefiting from this deleveraging,
the traditional carry-trade currencies, the Japanese yen and the Swiss franc.
What is more, substantial volumes of US
capital invested abroad are now being repatriated because the slowdown in
growth is affecting more and more countries, including the emerging markets.
meeting of the Fedâ€™s Open Market Committee (FOMC) is scheduled for next week.
Its risk assessment is expected to be rather balanced again: uncertainty
regarding inflationary trends remains a concern, but the decline in energy
prices and unit labour costs in the second quarter bolster the expectation held
by committee members that inflation rates are set to become more moderate in
the near future. As for growth, the FOMC will probably emphasise that â€“ despite
strong second quarter growth â€“ risks remain high, all the more so as the credit
crunch has intensified and unemployment has risen sharply.
Fed is therefore very unlikely to reduce its monetary stimulation any time
soon. In any case,
markets have already sharply scaled back their expectations that US interest
rates would turn around shortly, so that a statement worded along these lines
need not weaken the dollar. However, given the strong appreciation of the US
currency, a potential temporary setback cannot be ruled out.
Meister +49 69 718-2600
Grabbe / Klaus NĂ¤fken
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