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Friday March 20, 2009 - 16:48:35 GMT
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FX Briefing - Dollar weakens on Fed turning on the printing press

FX Briefing 20 March 2009

Highlights

·        Fed announces gigantic purchasing programme

·        Fed policy puts ECB under pressure

·        IMF expects global economy to shrink for the first time in 60 years

 

Dollar weakens on Fed turning on the printing press

This week, the euro jumped temporarily to over 1.37 against the dollar – 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 Fed’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 Fed’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 – the biggest monthly increase since records began at the beginning of the 1970s. EUR-GBP rose from about 0.925 to almost 0.95.

 

The UK and Japan 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 Fed’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 quantitative easing.

 

The US 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 ECB’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 Fund’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 ECB’s projection.

 

After the very weak economic data from Germany, we think it more likely that overall GDP in

the 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 council’s reservations to quantitative easing à 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 larger scale.

 

The 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 many US data are due next week. After the euro’s surge against the dollar this week, things could quieten down a bit again in the next few days.

Uwe Angenendt +49 69 718-3648

 

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.

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All rights reserved. Please mention source when quoting from it.

 

 

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