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Friday July 1, 2005 - 19:21:01 GMT
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Forex: FX Briefing July 1, 2005

- Fed indicates that expansion remains firm, reaffirms intention to raise interest rates

- Dollar hits highs against JPY, GBP, CHF; EUR out of firing line for time being

- Rise in US employment might be slightly above average

Monetary policy remains unrelenting
The dollar firmed on the forex markets in the course of this week. Today it has reached new highs vs. most of the other currencies. It rose to CHF1.29 vs. the Swiss franc, to SEK7.85 vs. the Swedish krone and to over JPY111 vs. the yen; the British pound fell below USD1.78.
There was not much movement in EUR-USD, on the other hand: After it had temporarily slipped below 1.20 last week, the European currency remained within the USD1.20 to 1.22 range this week. The euro had actually started out the week a little firmer, supported by favourable ifo business climate data and the new oil price high of $60. But then things reversed when the oil price corrected and the financial markets became increasingly focused on the FOMC meeting. At the end of the week, EUR-USD is trading at USD1.280.

Central banks remain on course
At its meeting on June 30, the US central bank raised the federal funds rate by 25 bp to 3.25%, at the same time reaffirming its intentions to remove monetary policy accommodation at a measured pace. Apparently the Fed is not as worried about the economy as some market participants. According to the statement, the expansion remains firm and the labour market conditions continue to improve gradually; the central bank still seems to believe that ending the cycle of
interest rate hikes too soon could pose a risk to price stability in view of the “elevated inflationary pressure”. The statement indicates that the Fed will raise interest rates at least two more times in the second half of the year.

The intention of both the Fed and the ECB is apparently to prevent structural imbalances from cropping up because monetary policies have been too expansive for too long. We were given some clues about this from this week’s Bank for International Settlements (BIS) Annual Report, which clearly states that the central banks tend to favour raising interest rates at least in principle. The BIS – undoubtedly in collaboration with the individual national central banks – mainly criticizes that the generous supply of liquidity and the low interest rate level favour ballooning asset prices. The “central banks’ bank” specifically points out the growing debt levels of private households and excessive house price increases.

With a view to the low level of the real refi rate (close to zero), the BIS has explicitly recommended that the ECB raise the refi rate if the economic recovery picks up steam. With a view to the ECB Council meeting next Thursday, this suggests that the central bank will not change course, let alone cut interest rates. The latest economic data and in particular the business climate figures lead us to believe that the economy is going to stabilize – especially in Germany and France. So for the moment at least the figures support the ECB’s view that the economy is going to recover again in the second half of the year.

US labour market data: Both misleading and straightforward
The highlight of next week will be the US labour market figures for June which are due on Friday. Even though it is widely known that the forecasts are very unreliable and that the preliminary results are extremely vulnerable to revisions, the figures which are released are still the best information available – and market participants will act accordingly. Thus it is worth taking a closer look at the perspectives:

The change in the employment figures has been very volatile in recent months: Since the beginning of the year at least, a strong figure has followed a weak one. In February and April, employment jumped up by 300k and 274k respectively and in March and May the increases only amounted to 122k and 78k respectively. Although the monthly figures are zig-zagging, the trend remains quite stable: Since the spring of 2004, the 6-month average has been fluctuating between 150k and a good 200k and is currently 175k. The Fed mentioned employment growth in its last statement, which can certainly be taken as a confirmation of the trend from an expert source.

The expectation that the June figure will be in line with the trend again is mainly supported by initial jobless claims. The 4-week average of 323k at the end of June was a good 20k lower than at the end of May. The current level corresponds with an employment rise of around 200k. The employment component of the Conference Board’s consumer confidence index also supports the favourable expectations. It reported that it was recently less difficult to find a job.

The June figures for the ISM index have not been released yet. In May, the manufacturing employment component slid to 48.8, which indicates that employment declined slightly in this sector – if this is confirmed in June, that is. Nonmanufacturing firms carry more weight, however. Here employment suffered a noticeable setback in May to 53.4, but this still indicates that this sector is expanding very solidly. It remains to be seen whether or not the June ISM index will bring any surprises. According to the information available to us at this time, we think an increase in employment of just under 200k is likely.

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.
© 2005 BHF-BANK Aktiengesellschaft
All rights reserved. Please mention source when quoting from it.


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