FX Briefing - Dollar climbs after US discount rate rise
FX Briefing 19
ÔÉė Fed presses ahead with normalisation of liquidity
ÔÉė EU makes no pledges to Greece, demands further austerity measures
ÔÉė UK budget situation deteriorates, pound under pressure
Dollar climbs after US discount rate rise
The forex market was quite volatile
this week. Initially, the spotlight was on the Eurogroup and Ecofin council
meetings in Brussels. After last week‚Äôs ‚Äúannouncements‚ÄĚ,
finance ministers were expected to come up with concrete proposals to help Greece. Market participants were therefore
disappointed that, instead of offering aid, ministers had demanded additional
austerity measures for Greece.
However, despite the public laments
about the EU‚Äôs unwillingness to take action, it had little impact on exchange
rates. It could perhaps have prompted the spate of profit-taking late on
Tuesday afternoon, on the back of which the euro surged to almost 1.38 against
the dollar. The fact that the minutes of the January FOMC meeting were due to
be released the following day probably also helped to trigger a short-covering
As from Wednesday, however, EUR-USD
began to weaken again. This was initially sparked by US economic data. After a
better-than-expected NY Empire manufacturing index on Tuesday, a significant
increase in production in January of 0.9% confirmed the upward trend in
industry. The rise in housing starts was also taken as a positive sign,
although the figure of 591,000 hardly signals a turnaround.
But it was the Fed which provided
the real momentum in the forex market. The minutes of the FOMC meeting make it
clear that the US central bank is seriously paving
the way for an exit from the emergency measures. Apart from the points outlined
by Fed chairman Ben Bernanke a few days earlier in his statement to the House
Financial Services Committee (see FX Briefing of 12 February), market
participants were surprised to learn that the central bank was already
considering starting to sell securities fairly soon.
On Thursday night, the Fed topped
that by raising the discount rate, as had already been heralded in Mr Bernanke‚Äôs
statement and the minutes. With immediate effect, the discount rate (which
roughly corresponds with the ECB‚Äôs refinancing rate) was raised by 25 bp to
0.75%. Furthermore, the typical maximum maturity for primary credit loans is to
be shortened to overnight. And last but not least, the minimum bid rate for the
final TAF auction on 8 March is also being raised to 0.5%.
At first glance, the measures seem
quite drastic, but their immediate impact will be limited. The banks have made
relatively little use of the discount window. And the volume of funds available
at the TAF auction had been reduced to $25bn anyway. The Fed emphasizes that
the modifications do not signal any change in monetary policy, but rather a
normalisation of money market transactions in light of the improvement in
financial market conditions.
But whatever the Fed might say, this
can be seen as a signal. The discount rate hike is the first interest rate
increase; it heralds a turnaround in interest rate policy in the US. It is not clear why
this decision was taken between two
meetings. Some observers think that it is to play down its importance. Others
see it as emphasising the urgency of the matter. At least the Fed is preparing the
ground in plenty of time to start draining liquidity from the market in the
On Thursday night, on the back of
the Fed decision, EUR-USD fell to below 1.35 for the first time since the
middle of 2009. In our view, the discount rate rise is just the first of a
series of measures which the Fed will introduce in the next few months to
tighten monetary policy. From this side, the US dollar will remain
well-supported for the time being.
This week, the pound sterling plummeted.
Cable fell by around 4 cents to below 1.54; even the weak euro rose against the
pound by 1 pence to almost 0.88. The sell-off was triggered by reports on the
budget situation: In January, normally a month with abundant revenues, the
public deficit totalled ¬£4.3bn ‚Äď which, unless counter measures are taken,
bodes ill indeed.
Some leading forex market observers
think that an appreciation of the yuan against the dollar is imminent.
They are expecting it to appreciate by about 5%. We still doubt whether the
Chinese government will alter the exchange rate in the present environment. China‚Äôs main problem at the moment is
credit-driven investment rather than exports. Furthermore, it would not fit
into the present political landscape to comply with US exchange rate demands.
The Swiss National Bank does not
comment on its currency market interventions. However, it looks as though it
intervened again on Thursday, when EUR-CHF was threatening to slide
Stephan Rieke +49 69 718-4114
Grabbe / Klaus N√§fken
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