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Tuesday September 20, 2005 - 22:08:35 GMT

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Forex: Dollar Soars on FOMC Rate Decision

DailyFX Fundamentals 09-20-05

By Kathy Lien, Chief Strategist

· Dollar Soars on FOMC Rate Decision
· Pessimism Hangs Over Euro
· Weak Same Store Sales Sends Yen Lower

US Dollar

The dollar broke higher following the Federal Reserve’s eleventh consecutive interest rate hike to 3.75% from 3.50%. The market latched onto the hawkish tone of the statement and shrug off the dissenting vote by Fed President Olson. The fact that the Fed left in the buzzwords “accommodative” and “measured” has injected a new a dose of enthusiasm into the market. It seems that for the most part, the Fed has paved the way for another quarter point rate hike in November. Yet, the fact that the Fed expressed concerns for weakness in “near term” spending, production and employment data is somewhat concerning since it remains questionable as to whether the market is ready for a batch of weaker economic data for the month of September even if conditions are not expected to worsen. Tropical Strom Rita still poses a threat to the Gulf States and even though OPEC agreed to make the rest of their reserves available to consumers, they do not have extra barrels of light sweet crude oil, which is the grade of oil that can be easily turned into petrol. Meanwhile, it is interesting to note that Olson’s vote to keep interest rates unchanged is the first time that we have seen a vote that was not unanimous since June of 2003. If you recall, it wasn’t too long ago across the pond that before the UK Monetary Policy Committee lowered rates, there were a few meetings where the final decision was not unanimous and after 2 meetings, more voters began to sway away from the neutral stance towards voting in favor of lowering rates – which was what eventually occurred. Applying this to the US, perhaps, Olson's dissenting vote may be more significant than we think.


The Euro is weaker once again following the Federal Reserve’s interest rate decision. Taking a look at the only piece of major economic data released from the Eurozone this morning and we see that the Germany elections played a big role in dampening sentiment for the month of September. The ZEW survey of German economic sentiment slipped 11.4 points to 38.6 from 50. Uncertainty about what economic policy will look like in the months and even years ahead has had a negative impact on investment sentiment. It appears that investors and analysts also fear that oil prices will sap domestic demand and Hurricane Katrina will slow global economic progress. So basically the expectations component deteriorated while the current conditions component improved. Politics should continue to dominate the headlines until we can get more clarity on how the new government in Germany will be structured.

British Pound

Another day, another conflicting housing price report in the United Kingdom. This time around, according to the Royal Institution of Chartered Surveyors, housing prices fell in the month of August. However, notably, the price decline fell the slowest in a year as the report revealed new buyer enquiries actually rose on the month. In addition, completed sales were also higher for the second month running, bouncing from the 7.5 percent low recorded in the month of February. Ultimately, this placed the balance of surveyors at a negative 26 percent for the month compared to a negative 36 percent reading in the prior period. With that said, noticeable similarities exist between both yesterday’s RICS and Rightmove housing prices report. Both reports point to continued price decreases. However, the pace at which these declines are running is beginning to slow in addition to a pickup in sales and consumer interest in residential property. Now, although rebound in prices may be a premature notion at this point in time, the fact that similarities do exist now suggests that the housing market may in fact be forming a bottom. A result of the first interest rate cuts in over two years, this bodes well for the economy as the sector has been a persistent concern for consumers and policy makers alike since sluggishness was first witnessed earlier this year. Ultimately, with slightly less pressure being applied by the housing sector, the only thing left to completely ease the mind of a central banker looks to be consumer spending as pound bulls look to take advantage of the silver lining.

Japanese Yen

Back from the holiday, traders digested annualized convenience store sales data for the month of August. To the yen bull’s utter disappointment, sales on a same store basis fell for the 13th consecutive month according to the Japan Franchise Association. This now is the 27th monthly decline in the past 30 months and doesn’t reflect well for an industrialized economy that is supposedly on track to positive expansion. Most notably in the overall figure, average consumer purchases fell 1.2 percent as the number of customers remained constant. With continued downside in consumer figures, this now leaves many to speculate that instead of individual spending strength, the world’s second largest economy may be fully underpinned by business investment in the near term as higher oil prices continue to remain a burden on the average individual’s wallet. Separately, however, foreign investors look to be furthering their bets on a full recovery as equity benchmarks reached fresh 4-year highs at the close. Advancing 0.8 percent higher, the Nikkei 225 Average closed above 13,000 at 13,061.44 as investors exited out of fixed income instruments. The last time this level was witnessed was back in 2001.


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