ECB representatives: small steps rather than leaps and bounds
The big rift
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 SNBâ€™s reduction of the 3-month Libor target rate to 0.5%. GBP, AUD and
CAD gained very little ground.
factors are responsible for the dollarâ€™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.
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
months, the dollar had been a refuge or retreat currency. But hopes of equities
limiting the dollarâ€™s upward potential. Bearing in mind, that year-end is
nearly upon us, exchange rate movements could also have been exacerbated by
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 councilâ€™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.
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 JĂĽrgen 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
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.
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.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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