Â·Buba president Weber unwilling to continue long-term tender â€śfor too
respite for the dollar
After losing ground for the last three weeks, the dollar now
seems to be getting some respite. EUR-USD, which was over 1.50 at the beginning of the week,
slipped to below 1.47 temporarily, only to recover to around 1.48 towards the
end of the week. Scandinavian and eastern European currencies and also
commodity currencies such as the Australian and Canadian dollars, the real and
the rand, posted similar or, in most cases, higher losses. The pound sterling
and the yen gained ground against the US dollar; both currencies had already
benefited from dollar appreciation against the euro in the past.
The dollarâ€™s recovery coincides with somewhat lacklustre
trading in equity markets over the last few days. Now that the most important
quarterly earnings reports in the US have been published, there is little impetus to push equities
higher. Many market participants might not be fully convinced about the
sustainability of economic recovery; as the end of the year is approaching, equity
market players could perhaps be starting to contemplate locking in their
The dollar was given a temporary boost on Thursday when US
GDP data for the third quarter was published. The preliminary estimate showed that the US economy grew again in Q3 for the first time after shrinking
for four consecutive quarters by a total of 4%. In the third quarter, real GDP increased by almost 0.9% compared to the previous
quarter, or 3.5% (annualised quarteron- quarter). This is somewhat higher than
The main driver was private consumption, which contributed
2.4 percentage points to growth. Primarily due to an improvement in residential
construction (0.5 percentage points), fixed investment also made a positive
growth contribution again of 0.3 points. The slower pace of decline in inventories
contributed almost one percentage point, and government purchases half a
percentage point. Net exports, on the other hand, shaved off half a percentage
point, mainly due to the sharp increase in imports.
Car purchases were responsible for about half of the rise in
consumer spending and can be put down to the car scrappage scheme, which has now
run out. Excluding car purchases, real GDP would have only grown by 1.9%. The
results in the third quarter are therefore likely to paint a far rosier picture
than is warranted by the underlying economic fundamentals.
Exit strategy comments
by Axel Weber
In a speech on Thursday, Bundesbank president Axel Weber
made some interesting remarks about the ECBâ€™s exit strategy. First of all, he distinguished
between interest rate policy measures, which reflect the macroeconomic
environment and in particular inflation risks, on the one hand, and â€śunconventionalâ€ť
policy measures to provide liquidity on the other. He said the liquidity measures
were a way of neutralising disruptions in financial markets, particularly with regard
to refinancing the banks. When the situation in financial markets eased, these
measures would no longer be necessary, according to Mr Weber.
Axel Weber appears to think that this could soon be the
case. â€śGiven the latest developments on financial markets and the corresponding
stabilization on banksâ€™ refinancing marketsâ€ť, he said, â€śit is inappropriate to continue the current operative regime
without any changes for too longâ€ť. Mr Weber sees the withdrawal of the
unconventional measures as a gradual process. Initially, the very long-term loans to banks could be scrapped i.e.
presumably, 6 and 12 month refinancing operations. The 3-month tender could
also be offered as an interest tender again, but Mr Weber did not mention this.
At a later date, the ECB would stop providing unlimited liquidity within the
framework of its main refinancing operations. And as a third step (if the
macroeconomic environment was right) interest rate changes could be considered.
Presumably, other members of the ECB governing council share
Bundesbank president Weberâ€™s opinion. As far as next weekâ€™s ECB council meeting is
concerned, however, we are still expecting the central bank to restrict itself
to gradually becoming more upbeat in its assessment of the macroeconomic
situation and gently hinting that exit will be necessary â€śat some pointâ€ť. But
in December at the latest, when its commitment to provide unlimited liquidity
runs out, the ECB will have to say to what extent it intends to continue the
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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