Friday March 17, 2006 - 18:48:02 GMT
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FX Briefing 17 March 2006FX Briefing 17 March 2006
â€˘ Markets revise expectations on fed funds rate rise to â€ś5% at mostâ€ť
â€˘ US government warns Japan not to prevent an appreciation of the yen
â€˘ Rumours about more aggressive ECB tightening
Back on the agenda: the end of interest rate tightening in the US
During the course of the week, the US dollar fell considerably. EUR-USD rose by around 2% to 1.2180, USD-JPY dropped by nearly 2% to 116.20. Most of the Scandinavian and central European currencies also recovered significantly from their previous losses. The New Zealand dollar was the only one of the more significant currencies to continue its slide against the US dollar.
The weakening of the dollar was a result of fiction rather than fact. After toying for a while with the idea that the Fed could raise the central bank rate to over 5 per cent, market players then changed their minds. In our opinion, this was largely because of comments from â€śwell informed circlesâ€ť and remarks made by Janet Yellen, president of the San Francisco Fed. The main arguments were that the Fed supposedly shared the view that growth would slacken in the second half of the year, and that, given the weakening of the housing market, the Fed would be more cautious.
None of the positive economic data had much impact on the American bond markets and forex market. Comments like those made by Jack Guynn, Atlanta Fed president, on the ample liquidity in the economy were also ignored. Neither the strong Empire State Manufacturing Index, nor the marked upward revision of retail sales for January, which put the February decline in a much better light, had any effect whatsoever. Retail sales excluding cars also developed better than expected.
The markets reacted all the more willingly to the weaker signals. They were pleased about the moderate rise in consumer prices, although the results were more or less as expected. However, despite the minimally lower monthly rise in core CPI, the annual rate is not likely to fall below 2% in the foreseeable future. The headline rate and â€śperceived inflationâ€ť will probably increase again soon, as gasoline prices (front contract NYMEX) are now above Januaryâ€™s level again. Housing market data were also interpreted rather selectively. Admittedly, housing starts have dropped significantly â€“ by 183,000 to 2.12m units. However, if this level is maintained in March, there would still be an almost 6% jump (+4.7% on Q1 2005) in Q1 2006 on Q4 2005. Certainly no reason for doom and gloom.
In addition to expectations for US interest rates being adjusted, rumours about the ECBâ€™s interest rate plans also supported the euro. According to a widely circulated press agency report, the ECB Council was supposedly more or less in agreement that the refinancing rate should be raised to a neutral level. And reportedly Council members put this level at 3 to 4%.
But this should not be taken as a revelation on the guidelines of ECB monetary policy. The significance of central bankers saying that they are aiming for a neutral interest rate level in the longer term is limited â€“ what else should they be aiming for? At the moment we do not see any necessity for a more aggressive tightening or any indication that the ECB is planning to do so.
The dollarâ€™s weakness against the yen is another matter. In addition to the BoJâ€™s policy change and the rising interest rate level, it must be taken into account that the yen is undervalued by most standard criteria, such as the current account balance or the real exchange rate. Given Japanâ€™s pressing economic problems, a weak yen had been accepted by the rest of the world. But this is now slowly changing. For the first time since the beginning of 2004, a representative of the US government â€“ Treasury Undersecretary for International Affairs Tim Adams â€“ has issued a word of warning concerning Japanese exchange rate policy: Japan should not resist an appreciation of the yen. It is obvious that Japan will not be able to avoid exchange rate corrections given the state of the US current account.
Stephan Rieke +49 69 718-4114
+49 69 718-3642
Foreign Exchange Trading
+49 69 718-2695
Matthias Grabbe / Klaus NĂ¤fken
+49 69 718-2688
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