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Friday November 13, 2009 - 15:34:40 GMT
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FX Briefing - EUR-USD: To exit or not to exit, that is the question

FX Briefing 13 November 2009

 

Highlights

Policymakers seek to reassure

Eurozone growing again

Start of exit strategy?

 

EUR-USD: To exit or not to exit, that is the question

As far as US monetary policy is concerned, the answer to this question became fairly clear this

week. The weak labour market data had already prompted speculation that an exit from the ultra-loose monetary policy was still a long way off. This week, comments from several US policymakers confirmed this impression, pushing the dollar down further. EUR-USD rose to 1.5048, thus coming within a whisker of hitting a new 15-month high, but dropped again later to 1.49. The British pound also lost ground, after BoE governor Mervyn King had not ruled out additional quantitative measures. Cable fell by over 2.5 US cents temporarily to 1.6516, but strengthened again towards the end of the week to almost 1.67.

 

All the uncertainty about a possible start to an exit from the expansionary monetary policy, has thus vanished into thin air. Both Janet Yellen, president of the San Francisco Fed, and Richard Fisher of the Dallas Fed expressed doubts as to whether the present upswing was sustainable. Given high unemployment, low wage growth and dependence on government economic stimulus measures, an expansionary monetary policy would have to be maintained for some time to come. The Bank of England governor spoke even more bluntly on the release of the inflation report. As the economic situation remained fragile, he said, the central bank was keeping an open mind over whether to implement further measures to boost the economy in addition to the recent expansion of the asset purchase programme.

 

Even Bundesbank president Axel Weber, whose thoughts on possible exit strategies had unsettled market participants the previous week, struck a very dovish tone this week: although the financial markets had stabilised significantly and most countries were now out of recession, the recovery was still fragile and it was thus too early for an exit from expansive monetary and fiscal policy measures.

 

The fact that the worst is over in the eurozone was underlined by the economic data. In the third quarter, all countries except Spain posted positive GDP growth rates again. In Germany, GDP actually increased by 0.7%, and the strong production figures suggest that growth is set to be robust in the coming quarter too. Italian GDP growth was almost as strong. But growth in France and the Netherlands turned out to be much weaker. In the euro area as a whole, gross domestic product rose again by 0.4%; the first increase after five consecutive declines, some of which had been very steep.

 

In the eurozone, discussions on an exit from expansionary monetary policy are likely to heat up again in December in the run-up to the important ECB governing council meeting. According to Bundesbank president Axel Weber, the gradual removal of support measures hinges on the situation in the financial sector. As the central bank has acknowledged that things in this field have stabilised significantly, we are expecting the ECB to at least announce the start of an exit strategy on 3 December. If it does in fact turn out to be the first major central bank to do so, this is likely to give the euro an additional boost. In the coming week, policymakers will have enough opportunity to give some indication of their future plans. They will all be meeting up at the 12th Euro Finance Week, where the restructuring of the financial sector will be discussed.

Uwe Angenendt +49 69 718-3648

 

Economics Department

+49 69 718-3642

volkswirtschaft@bhf-bank.com

Foreign Exchange Trading

devisenhandel@bhf-bank.com

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.

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