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Friday September 23, 2005 - 18:18:30 GMT
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FX Briefing 23 September 2005

• Fed sticks to its monetary course
• Hurricane Rita hits Texan Gulf coast
• ECB council member Garganas concerned about growing danger of inflation
• China widens trading band for non-dollar currencies

Dollar remains unfazed in turbulent times

Although times are turbulent, EUR-USD has only changed slightly. At almost 1.2150, the greenback is a little lower than last week. At JPY111.74, the yen also fell slightly. The relatively stable rates are due to two conflicting factors: the Fed’s eleventh consecutive interest rate increase has widened the gap with the other major currency areas, which in itself speaks for the dollar. The indecisive outcome of the election in Germany did not help the euro either. On the other hand, oil prices and in particular gasoline prices, which are on the rise again due to the impending approach of hurricane Rita, increased growth fears globally, which tended to burden the dollar.

As expected, the Fed stuck to its policy of cautious interest rate hikes and raised the Federal Funds Rate again by 25 basis points. More surprising than the actual interest rate increase was the fact that the Fed did not change its view on how it would proceed from now on. Although FOMC members are expecting hurricane Katrina to have a negative effect on US economy temporarily, they think that the long-term consequences will probably be limited. Moreover, as the price risks have increased, the FOMC has left its monetary assessment of the situation unchanged on the whole. Further moderate interest rate increases are thus to be expected.

Bond markets, however, do not share the Fed’s opinion. Immediately after the Fed’s decision, the capital market yield fell by over 10 bp. A cause for particular concern here is the imminent approach of hurricane Rita, which is heading for the Texan coast at a similar speed to Katrina. The forecasts are expecting the storm to weaken before hitting land late on Friday or on Saturday morning local time, but even a category 3 or 4 hurricane would cause severe devastation. Even beforehand, over 90% of the Gulf of Mexico’s oil production has been shut in. From a market point of view, the seven refineries situated in the endangered area are causing particular concern. If serious damages on the scale of those in New Orleans are incurred here, the supply situation for gasoline, diesel and gas will become increasingly critical.

In its new autumn forecast the IMF has taken its growth projections for the industrial countries down again. The global economy on the other hand is expected to continue growing buoyantly despite the high oil prices. But this forecast might already be out-dated, since the massive damages caused by Katrina could significantly change the macroeconomic picture. On the one hand, sustained high gasoline prices have already led to a severe deterioration in consumer sentiment in America. On the other hand, huge public funds are being poured into the US economy. It is expected that the $62bn pledged by Congress for hurricane relief aid will already be used up by the beginning of October. Given that another estimated $200bn are earmarked for a reconstruction and relief programme, we will see a lot more public funds flowing. Currently it is still difficult to assess how the contrary effects will influence growth and inflation in the US.

Hurricane Katrina’s effect on prices worldwide was already visible in the German inflation data for September. First reports from the Länder indicate that the inflation rate will rise from 1.9% to 2.5%. The euro area inflation rate, which will be published next Friday, is likely to be slightly higher even. ECB governing council member Nicholas Garganas thus appeared to be more concerned about the effects of the high oil price on inflation rather than on economic growth.

As far as the forex markets are concerned, the political vacuum in Germany has moved somewhat to the back burner. There are no fast results expected from the talks between the parties which have now started. The new Bundestag will not convene for the first time until 18 October. Whether there will be a majority for a Chancellor by then is still completely open. But two weeks after that, at the latest, it will be clear whether Germany has a new government or whether new elections will have to be held, which could be mid-December at the earliest.

Unexpectedly, China has adjusted its trading range for non-dollar currencies from 1.5% to 3%. The daily dollar trading band remained unchanged at 0.3%. The Chinese government is probably trying to gain more leeway to buffer possible negative effects resulting from a renminbi appreciation against the other currencies. However, it remains to be seen how China will make use of this new flexibility.

Uwe Angenendt +49 69 718-3648
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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