Thursday September 8, 2005 - 09:53:57 GMT
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INVESTICA Ltd - www.investica.co.uk
Fed looking at inflation
The dollar secured a generally firm tone during Wednesday, strengthening to a high close to 1.2400 in New York. The dollar was unable to push through this level, but remained firm on Thursday. The dollar secured some support from a moderation in oil prices and from another firm performance on Wall Street.
The Fed's Beige Book, released on Wednesday, was completed before the hurricane struck, but pointed to generally firm demand. There were reports of tightness in the labour market and some increase in wage costs, although inflation overall still appeared under reasonable control. The report will reinforce expectations that the economy was firm in August and will also maintain some concerns over the underlying inflation outlook, especially with high energy costs.
Interest rate policy will remain extremely important. Fed Governor Moskow stated that the Fed would remain vigilant over inflation, but also stated that the FOMC would have to make a judgement call on the economic impact. The overall impression given is that the Fed will still be looking to tighten policy on a 2-3 month view to curb inflationary pressure. The odds also just favour a rate increase in September. Market expectations have, however, already shifted back again to anticipating an increase and the dollar will find it difficult to secure further strong benefit from interest rate expectations.
There will be fears that the US budget and trade deficit will deteriorate further over the next few months. There will be additional congressional spending which could amount to at least US$200bn and there will also be an increase in import demand to compensate for domestic energy and agricultural losses.
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