Forex Blog - FX Briefing - Dollar unfazed by Fed policy
FX Briefing 28
gigantic bailout programme
stimulus packages to help mitigate recession
Â·ECB set to slash
Dollar unfazed by Fed policy
dollar plummeted temporarily this week; EUR-USD rose over 1.30 for the first
time in a
And dollar bears see a good chance of the greenbackâ€™s slide accelerating in the
next few weeks.
The reason for the dollarâ€™s fall was the US
central bankâ€™s surprise announcement that it was buying a further $800bn of
assets. Thus monetary policy easing in the US
is gaining a whole new dimension, which many observers believe will have a
negative impact on the dollar. Towards the end of the week, however, the US
currency firmed again.
Fedâ€™s new rescue plan to stabilize the financial system envisages lending up to
of asset-backed securities collateralized by new consumer loans. The central
bank is also
planning purchases of up to $100bn in direct obligations of Freddie Mac, Fannie
Mae and the Federal Home Loan Banks, and also, via selected asset managers, up
to $500bn in mortgage backed securities backed by Freddie Mac, Fannie Mae and
intervening directly in the mortgage and consumer credit market, the Fed is
of quantitative easing. Since September, the central bankâ€™s balance sheet has
$800bn to over $2,000bn, as a result of the various liquidity measures it has
taken. With the latest plans, the balance sheet will probably reach about 20%
of US GDP. The federal funds rate
is also indicating that, despite a central bank rate of 1%, the Fed is already
in a quantitative easing
phase: it has been below the Fedâ€™s target rate of 1% for over a month. The
flood of liquidity in the last few weeks has had little impact on the dollar up
to now, because the additional central bank funds are being regarded as a
substitute for market liquidity, which had virtually dried up. However, the Fed
must take care that confidence in the value of the greenback is not shattered
in the longer term.
Obamaâ€™s new economic team has already made an announcement: as soon as the new
administration takes office in January, it will implement an economic stimulus
package costing between $500 and $700bn â€“ the biggest ever. Europe
is considering similar measures to help to mitigate the effects of recession.
The EU Commission, for instance, has proposed a European package totalling â‚¬200bn
to boost the economy. However, it will be hard to reach an agreement at the EU
summit meeting on 11 December on coordinated national stimulus packages.
is no longer any doubt as to whether these packages are necessary. The leading
indicating an economic collapse next year. Economic sentiment in the eurozone
has plummeted recently â€“ it has not been so low since the recession in the
early 1990s. The gloomy economic outlook is putting commodity prices under sustained
pressure. The price for WTI crude oil dropped below $50 per barrel temporarily.
As a result, inflation rates in the eurozone have already fallen drastically in
November, from 3.2 to 2.1%.
gives the European Central Bank considerable scope to cut interest rates next
week, especially as the impact of the credit crisis on monetary aggregates
seems to be increasing. Lending to private households, for example, has
dropped. The ECB is likely to revise its growth and inflation projections down
significantly. Jean-Claude Trichet has already indicated that growth in the eurozone
is likely to be somewhat weaker in 2009. The average annual inflation
projection for 2009 and 2010 could even be below the ECBâ€™s target rate of just
under 2%. We are expecting the ECB governing council to take advantage of the scope
that it has next Thursday, and to cut interest rates by at least 75, or
possibly even 100, basis points.
Angenendt +49 69 718-3648
Grabbe / Klaus NÃ¤fken
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