purchasing programmes, reduces certain quantitative measures further
Â·USA puts correcting global imbalances on G20 agenda
Â·China emphasises importance of a stable yuan
Mervyn King finds depreciation of sterling â€śhelpfulâ€ť
Global imbalances are back on the
The US dollar was weak for the most part in the first
half of the week, but regained some ground after the Fed Open Market Committee meeting. The
movement was triggered primarily by favourable equity markets and expectations
that the Fed would confirm its expansive monetary policy stance. On Wednesday
evening, after the release of the FOMC statement, the US equity market hit a new one-year high. So did
EUR-USD, which rose to 1.4844. USD-JPY dropped below 91.
The euphoria was only short-lived, however. By the end
of trading on Wednesday, US equities
had fallen sharply again, and the dollar had strengthened.
The dollarâ€™s recovery came to a
temporary halt when Asian and European equity markets
stabilised. In US trading on Thursday, share prices plummeted again. EUR-USD fell to around
1.47. Towards the end of the week, USDJPY weakened to around 90, after Japanâ€™s finance minister Fujii reiterated his opposition to
intervention in Pittsburgh.
Although the FOMC meeting appears to have been the
turning point, it offered no real surprises. As expected, the central bank
reiterated its intention to maintain its expansive monetary policy for an
extended period. Although the Committee sees tentative signs of economic
recovery, it warns of negative factors: high unemployment, sluggish income
growth, wealth losses and credit constraints. These are likely to dampen economic
activity for quite some time.
However, the US central bank also appears to be preparing a cautious
exit from quantitative easing. In the latest statement, the Fed no longer promises
to employ â€śall available toolsâ€ť to promote economic recovery, but now uses the
term â€śa wide range of toolsâ€ť. This is also in line with the decision not to
complete the purchase of $1.25 trillion of agency MBS and $200 billion of agency
bonds by the end of this year, but by the end of the first quarter of 2010
instead. On Thursday, the Fed also announced that the Term Auction Facility
(TAF) and the Term Securities Lending Facility (TSFL) would be reduced.
Furthermore, there are rumours that the Fed is discussing reverse repurchase
agreements with market participants.
Speculation about the possibility of the Fed tightening
monetary policy sooner than expected cannot, however, be the sole reason for
the firmer dollar and weaker equity market. This argument would not tally with
the latest developments on the interest rate front. In the latter half of the week,
yields on 2-year Treasuries have fallen from about 1.0 to 0.94%, and Fed Funds
Futures for the middle of next year have reached new highs.
Against this backdrop, the stabilisation of the dollar
should rather be interpreted as consolidation. Uncertainty about the further potential of equity
markets probably played a part: on the one hand, in view of the impending third
quarter reporting season, and on the other, the growth expectations for industrialised countries being only modest in the
While this FX Briefing was being written, the G20
summit was in full swing. Reports and results are not expected until Friday
night. In our view, the US are trying to push the topic â€ścorrecting global
imbalancesâ€ť into the foreground. This is mainly about the high deficit in the US and the corresponding surpluses in Asia,
particular China, the Middle
East and â€“ mentioned
occasionally â€“ Germany. The current account imbalances are seen as
reflecting either (too) strong or (too) weak domestic demand. In calling for
global imbalances to be corrected, the US are primarily interested in promoting their own
exports. Foreign demand should make up for weaker domestic demand in the US. This is inevitably linked with the exchange rate
situation, as domestic and foreign demand are dictated by exchange rates.
In addition: the UK is apparently discovering the appeal of the
depreciation of sterling too. In a press interview, Mervyn King, governor of
the Bank of England, commented that the decline of
the pound was â€śhelpfulâ€ť in rebalancing Britainâ€™s economy. â€śA shift of resources into net exportsâ€ť was
what was now needed. These remarks were probably the main reason for sterlingâ€™s
renewed weakness. After the interview was published, EUR-GBP rose to almost
Against a background of the US calling for discussions on correcting global
has wasted no time in putting forward its point of view.
The president, Hu Jintao, stated that a stable yuan had been instrumental in stabilizing
economic activity in the Far
East. And addressing exporters, central bank president Zhou Xiachuan emphasised
the importance of a stable yuan. But the German government is also being rather thin skinned.
German Chancellor Angela Merkel, who is standing for re-election this weekend, warned
against diverting the G20 agenda away from financial market regulation to other
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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