Friday September 24, 2010 - 15:39:41 GMT
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FX Briefing - Dollar under pressure after Fed meeting
FX Briefing 24 September 2010
ÔÉė FOMC toying with idea of additional easing measures
ÔÉė USA increases pressure on China to allow yuan to appreciate
ÔÉė Ifo improves again slightly in September; retail trade buoyant
Dollar under pressure after Fed meeting
The dollar has weakened again this week, losing ground against almost all major currencies, particularly against the euro and other European currencies like CHF, SEK, NOK and HUF. Congress and the US government are currently increasing pressure on China to allow the yuan to appreciate significantly. President Obama himself also called on China to do so. The Chinese government is launching verbal counterattacks, but is nevertheless letting the yuan appreciate somewhat. In the last fortnight, the yuan has firmed by about 1.5%, and by a total of 2% since China‚Äôs announcement in June that it would allow the exchange rate to become more flexible. The threat of BoJ intervention probably prevented USD-JPY from dropping more sharply. The dollar slipped slightly during the course of the week from about 85.50 to 84.50.
Dollar weakness was probably triggered by the FOMC meeting which ended on Tuesday evening. The assessment of the economic situation remains much the same: the open market committee sees growth slowing, with private spending remaining constrained by high unemployment, lower housing wealth and tight credit. However, in the statement, the FOMC now ‚Äúofficially‚ÄĚ declares that measures of underlying inflation are currently somewhat below those most consistent with its mandate to promote maximum employment and price stability, and signals more directly its willingness to provide additional monetary accommodation to support its political mandate.
Thus it is becoming more likely that the Fed will introduce additional quantitative easing measures (Quantitative Easing II). These are likely to comprise increasing central bank purchases of Treasury bonds and possibly also of mortgage bonds. The bond markets rose accordingly; yields on 10- year T-notes fell by about 10 points to around
But no decision has yet been taken. At the end of August, Fed chairman Ben Bernanke announced that the economic situation would have to deteriorate significantly to warrant additional monetary policy accommodation. Key indicators have in fact stabilised or even recovered slightly recently. Furthermore, FOMC members‚Äô views on this subject appear to diverge widely ‚Äď as the minutes of the August meeting show. What is more, given that yields are at very low levels as it is, and that private debt needs to be unwound, it is uncertain how effective QE II would actually be.
Nonetheless: the last FOMC meeting has paved the way for further easing, which has boosted EUR-USD. On the whole, the picture was mixed across the eurozone: one positive factor was the successful and several times oversubscribed Irish government bond auction last Tuesday. This helped to dispel fears about the health of Irish public finances to some extent. It must be borne in mind, however, that during the course of the week the credit spreads have widened over German bunds to almost 430 basis points for 10-year Irish bonds. The news of an unexpected and sharp decline in GDP in Q2 (by 1.2% quarter-onquarter) will presumably also have played a part. The sharp decline was brought about by losses incurred by multinational companies in Ireland; gross national income, which excludes these effects, has fallen much less steeply by ‚Äď0.3%. Nevertheless, the Irish economy is not yet showing any sign of improvement.
Germany‚Äôs economic performance continues to be encouraging. The ifo business climate index has improved marginally again in September, from its high level of 106.7 to 106.8. Business expectations have declined (103.9 after 105.2), but the assessment of the situation has improved once again (109.7 after 108.2). The retail trade has performed particularly well, prompting us to raise our forecast for private consumption in the second half of the year. GDP growth in Germany could thus reach 3.5% in 2010, and 3.0% in 2011. Bearing in mind that other eurozone countries also benefit from robust domestic demand in Germany, there is unlikely to be a sharp drop in growth in the euro area in Q3.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2175
Matthias Grabbe / Klaus N√§fken
+49 69 718-2146 / -2683
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