Sunday November 6, 2005 - 12:13:18 GMT
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Forex: FX Briefing 4 November 2005Highlights
• Shift in US monetary policy
• US economy reaches limits of inflation-free growth
• ECB to bring interest rate to a neutral level
US monetary policy supports the dollar
The dollar started the week buoyantly. At around USD1.1950, EUR-USD was around 2 cents below the previous week’s level. The weakness of the yen against the dollar and the euro continued. This week, the Japanese currency narrowly missed a historical low against the euro at 141.20. The widening interest rate differential to the other major currencies is still weighing on the yen.
This week the Fed raised the Federal Funds Rate for the 12th consecutive time to 4 per cent. Although interest rates have reached at least the lower region of the neutral zone, the Fed has not given any indication that its policy of raising rates at a measured pace will soon come to an end. The important passages of the FOMC statement remained the same. The economic uncertainties caused by hurricanes Katrina and Rita were no longer emphasized.
On the contrary: according to the FOMC, the reconstruction activities will give the US economy additional growth impetus. But the US economy has already been growing above its production potential for the last ten quarters, so that both the labour market and production capacity are approaching areas with growing inflation risks. Thus Fed chairman Greenspan appeared concerned during his hearing before Congress when pointing out the risks of costs being passed on. In his opinion, even long-standing global powers could not keep inflation and interest rates low for ever.
In our opinion, several factors are indicating a shift in US monetary policy. Whereas in previous quarters, the main aim was to bring the interest rate back to a neutral level, monetary policy in the year 2006 could be focused on containing inflation risks. With this in mind, the interest rate in the US could be brought to the upper end of what can still be classed as neutral, which we see as being about 5 per cent. However, there is a big risk that the more price increases are passed on, the more the core inflation rate will be affected. In this type of scenario, a more aggressive Fed policy would be conceivable.
Thus US monetary policy will probably still support the dollar in the foreseeable future. The
European Central Bank will also start bringing the interest rate back to a neutral level in Decemeber, which we see as around 3 per cent. However, this is primarily a reaction to the normalization of growth in the euro zone. We do not see big inflation risks like those in the US, in the euro zone.
Hardly any indicators for the US economy are due to be released next week. GDP figures from France will attract considerable interest, as they will give the first indication of the economic momentum in the euro zone in the second half of the year. The respective data from Germany and the first estimate for the whole currency area will then follow the week after.
Uwe Angenendt +49 69 718-3648
+49 69 718-3642
Foreign Exchange Trading
+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.
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