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Friday December 12, 2008 - 14:34:03 GMT
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Forex Blog - FX Briefing - The big rift

FX Briefing 12 December 2008

Highlights

  • Dollar loses ground, euro rises well over 1.30
  • Obama package buoys equity markets
  • ECB representatives: small steps rather than leaps and bounds

 

The big rift

During the course of the week, the US dollar has depreciated significantly against (practically) all major currencies. The euro gained almost 5% to about 1.33. EUR-USD even touched 1.34 for a short time. At first, the Japanese currency only posted very moderate gains, but strengthened towards the end of the week, closing 2.5% higher at a 13-year high of 90 yen to the dollar. USDCHF made similar gains, partly because of the SNB’s reduction of the 3-month Libor target rate to 0.5%. GBP, AUD and CAD gained very little ground.

 

Several factors are responsible for the dollar’s slide. First, equity markets seem to be stabilizing somewhat, which probably played a part. For the last three weeks, the Dow has been in a trading range of 8000 to 9000. At the beginning of the week, when President-elect Barack Obama reiterated that he was planning an economic stimulus package of up to $700bn, the Dow rose over 9000 for the first time in a month. Furthermore, at least up until Friday, markets were relatively optimistic that the US car industry bail-out package would go through.

 

The fact that equity markets are calming down, which is reflected in the decline in implied volatility, for example, is weighing on the US currency in foreign-exchange markets. In the last

few months, the dollar had been a refuge or retreat currency. But hopes of equities recovering

are limiting the dollar’s upward potential. Bearing in mind, that year-end is nearly upon us, exchange rate movements could also have been exacerbated by profit-taking.

 

Another factor is probably the monetary policy rift between the Anglo-Saxons and the Continental Europeans, which seems to have widened again since the ECB governing council’s December meeting. On the one side, the monetary policy sluice gates are being thrown wide open in an attempt to prevent the financial and economic crisis from escalating further; the Fed has taken the lead here, with the central banks of the UK, Canada, and presumably also Australia and Switzerland, all following suit.

 

On the other side, there is the European Central Bank, which, having cut interest rates to 2.50%, clearly sees no urgent need for further action. Various ECB representatives, including Jürgen Stark, Axel Weber and Yves Mersch, indicated after the meeting that interest rates were now at the right level given the current economic outlook. No data which could lead to a change in assessing interest rate policy were expected in the next few weeks. Although there was still further room for manoeuvre, this was only limited. The ECB was rather thinking along the lines of small interest rate steps. There was less risk of a deflationary development than of inflation accelerating in the medium to long term.

 

While the ECB is in wait-and-see mode for the time being, the US central bank is likely to cut interest rates to 0.5% next week. We are also expecting the Fed to indicate that it is prepared to use all measures at its disposal, including unconventional ones, to combat the financial and economic crisis.

 

The FOMC meeting is in itself a burdening factor for the dollar, especially in view of the divergence in Fed and ECB policy. However, the open market committee meeting is not likely to bring any real surprises. Bearing in mind that there is now uncertainty in equity markets due to the senate blocking the auto bail-out package, and that fundamental data are showing that economic activity and employment are collapsing, crisis fears could increase, which in turn could trigger renewed interest in the dollar.

 

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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