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Monday August 1, 2005 - 10:39:21 GMT
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Forex: FX Briefing

- China dampens hopes of a rising renminbi
- US orders show ongoing momentum in industry
- Euro benefits from improved economic prospects in the EU

EU economy steadies itself
The euro’s downward trend was stopped at USD 1.1860 at the beginning of July, the subsequent recovery ending four cents higher at USD 1.2260. For about nine weeks, prices have thus been gravitating around the range of USD 1.20 to 1.21. The situation was no different this week. The depreciation of the renminbi initially weighed down on the dollar but had less influence when the Chinese monetary authorities indicated that they did not intend to make any significant adjustments to the exchange rate in the foreseeable future.

With speculation of a potential appreciation of the renminbi receding into the background, the dollar regained ground not only against the Asian currencies but also against the euro. USD-JPY rose up to JPY 112.80 in the first half of the week and has since been trading above JPY 112. The Japanese yen is, however, also suffering from the political uncertainty of whether Koizumi will succeed in his plan to privatise the Japanese postal service. Furthermore, the sharp increase in Japanese net securities purchases abroad has drawn attention to the dollar’s high interest rate advantage over the yen.

The “China factor” initially weakened the euro as well. The surprisingly favourable business climate data published by the German ifo institute on Tuesday were unable to support the euro as they were neutralised by optimistic expectations as regards US consumer confidence. When US consumer sentiment turned out to be disappointing, EUR-USD got back on its feet, but fell back to USD 1.1980 on Wednesday. The extraordinarily strong US new orders for durable consumer goods notwithstanding, the dollar was unable to break through this technical mark and the euro surged up to USD 1.2050. The euro’s firm trend continued in the second half of the week: Prices peaked at 1.2150 and are around USD 1.21 as the week draws to a close.

Even before Alan Greenspan’s testimony to Congress it was rather clear that the Fed would be maintaining its policy of raising interest rates for some time to come. The current economic data confirm at the same time that the US economy is showing an extraordinarily sound trend. The slight drop in growth in the second quarter seems to be mainly due to movements in inventories and fluctuations in investment activity, whereas the most important pillar – private consumption – stood its ground.

Most importantly, the current leading indicators show that the economy might even be gaining momentum in the second half of the year. The Conference Board’s Leading indicator rose sharply in June and the results of surveys such as those conducted by the ISM institute or the Federal Reserve Banks have once again improved. The latest new orders figures show that the order books are more than well filled and indicate an upward trend in capital investments. The term “Goldilocks” seems to have found its way back into market talk, though often half in earnest and half in jest.

Nevertheless, the dollar is unable to win the upper hand against the euro on the forex markets. For one thing, this is certainly due to the fact that EUR-USD has already lost a good deal since the beginning of the year: A good 10% since the start of the year and around 6% in the last three months. For another, the markets’ expectations as regards the key rates are rather firm. The Fed has largely maintained the monetary course it had announced, irrespective of any temporary changes in economic prospects. The US economy and interest rates are therefore far from feeding speculation on the forex markets.

Expectations in the eurozone are currently subject to a much greater degree of fluctuation and revision. In June, the markets were still toying with the idea that the ECB might sooner or later magree to reducing the key rate to under 2%. The ECB has now responded in the negative. Furthermore, there are more and more signs that the eurozone economy might actually recover: The eurozone business climate has now improved in two successive months, the depreciation of the euro makes it slightly easier for European companies to stand their ground in international competition, and the current quarterly figures show a favourable trend in profits. Even in the ailing French and German economies, the labour markets are showing the first glimmer of light at the end of the tunnel. As far as Germany is concerned, the elections to be held in September raise additional hopes that their outcome will result in the economy turning to the better.

When assessing the future interest rate trend in the eurozone, it should also be noted that inflation in the short or medium term might be higher than expected by the ECB so far. The faster growth in money supply and lending should also prompt the central bank to keep a close eye on developments. As regards the single currency, it remains to be seen whether the trend towards recovery in Europe is strong enough to face up to the ever increasing attractiveness of US interest rates.

Full report can be found on LIN K

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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