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Friday October 30, 2009 - 15:41:48 GMT
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FX Briefing - Some respite for the dollar

FX Briefing 30 October 2009


·        EUR-USD retreats to below 1.50

·        US economy grows again in Q3 for the first time

·        Buba president Weber unwilling to continue long-term tender “for too long”


Some 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 dollar’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 profits.


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 consensus estimates.


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 ECB’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 “unconventional” 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. “Given the latest developments on financial markets and the corresponding stabilization on banks’ refinancing markets”, he said, “it is inappropriate to continue the current operative regime without any changes for too long”. 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 Weber’s opinion. As far as next week’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 “at some point”. 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 unconventional measures.

Stephan Rieke +49 69 718-4114


Economics Department

+49 69 718-3642

[email protected]

Foreign Exchange Trading

[email protected]

Jörg Isselmann

+49 69 718-2695

Matthias Grabbe / Klaus Näfken

+49 69 718-2688


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.

© 2007 BHF-BANK Aktiengesellschaft

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



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