FX Briefing - Dollar weakens on Fed turning on the printing press
FX Briefing 20
gigantic purchasing programme
Â·Fed policy puts
ECB under pressure
global economy to shrink for the first time in 60 years
Dollar weakens on Fed turning on the
week, the euro jumped temporarily to over 1.37 against the dollar â€“ a
three-month high. This was
triggered by the US
central bank announcing that it was planning to inject even more money into
the economy to combat the deep recession. The Fedâ€™s decision to turn on the
printing press also weakened the dollar against the yen, which had been under
pressure in the previous weeks. After the Fedâ€™s announcement, USD-JPY firmed significantly
to 95.88. The pound sterling also suffered
a fresh setback, as the number of people claiming unemployment benefit surged
to a new record
high in February â€“ the biggest monthly increase since records began at the
beginning of the 1970s. EUR-GBP rose from about 0.925 to almost 0.95.
have already extended their purchasing programmes, and on Wednesday evening, the
Fed announced that it too was planning to buy an additional $1 trillion worth
of securities. Over the next six months, it will purchase $300bn worth of
Treasuries. The markets had been expecting further quantitative easing
measures, but not on such a massive scale. The Fedâ€™s aim is to increase the
availability of credit and to ease credit conditions for companies and
households. The announcement had an immediate impact. Within a few minutes, the
yield on Treasuries dropped by 50 basis points to a mere 2.5%. We are expecting
US interest rates to fall further in the coming weeks and months as a result of
currency is likely to remain under pressure for other reasons too: on the other
side of the Pond,
there is still quite a lot of opposition in the ECB governing council to a zero
interest rate policy, and discussions about further quantitative easing
measures are only at a very early stage. However, it looks as though the
economy in the euro area will turn out to be a lot worse than the ECB had been
assuming in its projections at the beginning of March. In these, the ECBâ€™s
experts had considered it likely that GDP would contract by 2.2 to 3.2%.
Yesterday, the IMF released its latest revised forecasts: the Fundâ€™s experts
predict that the global economy will shrink by 0.5 to 1% for the first time in
60 years. They are expecting the eurozone economy to decline by 3.2%. This
would be at the bottom of the range in the ECBâ€™s projection.
the very weak economic data from Germany,
we think it more likely that overall GDP in
euro area will shrink by around 5%. And in 2010, it could fall by 1.8%. The ECB
will definitely have to revise its projections down again considerably as early
as June. We are therefore expecting the ECB governing councilâ€™s reservations to
quantitative easing Ã la Fed to crumble further. As from June at the latest,
the ECB will probably also have to resort to buying bonds in the euro area on a
first eurozone climate indicators for March will be released next week. The ifo
business climate index in particular could give some indication as to whether
the massive downward movement in the manufacturing industry is gradually slowing
down. In our view, however, sentiment will continue to deteriorate. The
improvement shown in the ZEW index this week is unlikely to be confirmed. Not
data are due next week. After the euroâ€™s surge against the dollar this week,
things could quieten down a bit again in the next few days.
Angenendt +49 69 718-3648
Grabbe / Klaus NÃ¤fken
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