signal continuation of expansive monetary policy, no exit
are boosted by liquidity and recovery hopes
discrepancy between market sentiment and fundamental prospects
Dollar: safe-haven appeal is fading
After moving sideways for months, the dollar has now
fallen below the lower boundary of the trading range. The US currency weakened against almost all major
currencies, the ICE Dollar Index dropped by around 2%. EUR-USD rose to about 1.46;
USD-JPY fell below 91 â€“ the lowest level= since February.
The dollarâ€™s breakout below the usual trading range
happened quite suddenly on Tuesday morning. There was no particular reason for
the movement; it was brought about by shifts in the economic situation as a
Equity markets have firmed and credit spreads narrowed.
Both these factors indicate that market participants are gaining confidence in economic recovery.
After the rout at the beginning of September, which had caused alarm across the
globe, Chinese equity markets have also stabilised again, â€“ mainly because the government and the central
bank reiterated that there would be no policy change, particularly as far as
bank lending was concerned. The positive market development is pushing the
macroeconomic risks into the background, investorsâ€™ risk appetite is
The sharp appreciation of the dollar last autumn was
due to the financial crisis: dollar-oriented investors retreated into
safe-haven US investments. At the same time, it became extremely difficult for
banks and other market participants across the globe to refinance their
dollar liabilities. They therefore obtained liquidity wherever
it was available (e.g. from the ECB), and bought dollars on the forex market. During
this phase, the regional crisis turned into
a global recession. Growth outside the US collapsed, and central banks in Europe
and in other
parts of the world cut interest rates. The interest rate
advantage over the US vanished in the space of a few months. As hopes of
recovery grow, the forex market is starting to return to normal.
For a while, the dollar was supported by the notion that
the US could be the first country to overcome the crisis and
tighten monetary policy (â€śfirst in, first outâ€ť). On the first signs of economic
stabilisation, markets had even speculated on the Fed starting to raise
interest rates in autumn 2009.
Markets have now become much more cautious again,
however. Given high unemployment,
householdsâ€™ loss of assets and banksâ€™ lending constraints,
the Fed is sceptical as to whether
private consumption can provide enough momentum for a
dynamic upswing. Furthermore, the Fed is signalling very clearly that it has no
intention of tightening monetary policy at the present time. Fed vice chairman
Donald Kohn said on Thursday that, given low inflation and the weak global
economy, a sharp rise in short-term interest rates was quite unlikely.
According to the official statement of the Open Market Committee â€śeconomic
conditions are likely to warrant exceptionally low levels of the Federal Funds
rate for an extended periodâ€ť.
The confidence reflected in equity markets and credit
spreads is in remarkable contrast to the
central banksâ€™ sober assessment of the economic outlook
â€“ with which we basically agree. It looks as though the rebound in equity
markets is mainly a result of the favourable combination of cheap liquidity and high public spending. There is
nothing wrong with this. Policymakers are hoping that, with improved market
valuation of shares and other assets, favourable financing conditions and
growing confidence, companies and private households will gradually become more
willing to increase spending again.
At the moment, however, the economic situation is
still very difficult, particularly with regard to
the employment situation and corporate capacity utilization
and the burdens on the banking system. Moreover, in many countries there is
little additional scope for fiscal policy. Most economic stimulus programmes,
which are now still helping to stabilise incomes, will run out in 2010 and 2011.
Thus the recovery might not be as dynamic as markets are expecting.
In this situation, the forex market players will have
to weigh up very carefully the momentum,
boosted by monetary and fiscal policy, from the equity
markets, and the fundamental risks. In the short term, we do not see much
likelihood of possible setbacks. The forthcoming economic indicators â€“ for the
third quarter â€“ are set to remain favourable for the most part.
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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Mon 19 Mar 2018 Tue 20 Mar 2018 AA 9:30 GB- CPI A 10:00 DE- ZEW Survey Wed 21 Mar 2018 AA 03:00 AU- Employment AA 9:30 GB- Employment A 12:30 US- Current Account AA 14:00 US- Existing Homes Sales A 14:30 US- EIA Crude A A18:00 US- Fed Rate Decision A 21:00 NZ- RBNZ Rate Decision Thu 22 Mar 2018 AA All Day flash PMIs AA 9:30 GB- Retail Sales AA 12:00 GB- Bank Of England Decision A 13:30 US- Weekly Jobless Fri 23 Mar 2018 AA 12:30 CA- CPI/Retail Sales A 12:30 US- Durable Goods A 14:00 US- New Homes Sales
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