extensive additional resources into IMF, reduce country risk
interest rate cut to 1.25%
Crisis? What crisis?
week, the dollar weakened significantly. EUR-USD, which had dropped to 1.31 at
of the week, rose above 1.35 temporarily on Thursday. The pound sterling and
the Australian and New
Zealand dollar were also
on the winning side, gaining 2 to 3%. Those currencies which had suffered
particularly over the past weeks gained the most ground. The zloty, for instance,
appreciated over 6% against the dollar, the forint almost 5%. Other emerging
such as the Turkish lira, the rand, the Mexican peso and the Brazilian real
also strengthened considerably. The Asian currencies, however, only made very
moderate gains. The yen actually weakened against the dollar; USDJPY is now
trading at around 100 again.
developments in the forex market reflect an initial glimmer of hope for the
economy, which has
grown stronger partly because of the measures agreed at the G20 summit. Against
equity markets also posted significant gains. But the ECBâ€™s decision to cut the
refi rate by 25 basis points only probably played a part too.
Mixed economic signals and G20
markets rallied worldwide. Bullish technical signals could have made market
participants more inclined to see the economic indicators, which were mixed for
the most part, in a favourable light. The ISM manufacturing index as a whole,
for example, only improved marginally in March to 36.3. The increase in the
orders component from 33.1 to 41.2, however, was regarded as a ray of hope. The
unexpected rise in US vehicle sales in March was also seen as a good sign. And finally,
pending home sales increased, as new and existing home sales had done before,
confirming the idea that the housing market could have bottomed out.
the economic crash over the last few months, it is hardly surprising that
somewhat, particularly in the troubled housing and automobile sectors. The Fedâ€™s
quantitative easing measures are also having an impact. However, unemployment
is continuing to soar. At the end of March, initial jobless claims hit the
highest level since 1982. The unemployment rate rose to 8.5% in March; in the
first quarter as a whole, almost two million jobs were slashed. We fear that
the contractive effect of this will continue to dampen economic activity for some
time to come.
G20: political milestone, but not a
G20 summit in London
was undoubtedly a great political success. A further massive cash
into the IMF, additional funds for the World Bank and the regional development
banks, a commitment to free trade, and extensive measures to promote exports, a
fundamental agreement on strengthening financial market regulation â€“ no small
achievement, given the diverse interests of the participants.
the measures agreed at the G20 are not a â€śmiracle cureâ€ť for the crisis. The
additional funds will give the International Monetary Fund the necessary
resources to be able to offer effective help to member states with balance of
payment problems. This lowers the risk of country defaults, and country risk
premiums, which are very high at present, should go down. From this point of
view, it is easy to understand why currencies of countries with weak balance of
payments have strengthened. The $750bn are not to be used to finance additional
expenditure or economic packages.
Oops! They did it again
its meeting last Thursday, the ECB governing council decided to cut the refi
rate by 25 basis
to 1.25%. This disappointed markets, which, after comments made by ECB vice president Lucas
Papademos and other council members, had been expecting a 50 basis point cut.
Yields on Bunds went up by about 15 points to 3.15% at the long end, and in the
two year maturity segment by more than 20 points to 1.46%. Within two days, the
interest rate advantage over the equivalent US Treasuries widened by 14 to 57 basis
any rate, President Jean-Claude Trichet indicated that he sees further scope
for interest rate cuts.
Moreover, he announced that a decision on possible unconventional measures
would be taken at the next policy meeting in May. However, neither Mr Trichet
nor the governing council gave any explanation as to what results they are
expecting the gradual cuts to have in the current economic environment.
participants are interpreting the ECBâ€™s half-hearted step as a sign that the
ECB is not
willing to adopt the aggressive strategy of other central banks â€“ in the US,
The interest rate gap in the euroâ€™s favour is thus likely to remain positive.
It therefore comes as no surprise that the euro is approaching record high
levels on a trade-weighted basis.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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