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Friday April 21, 2006 - 14:52:06 GMT
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FX Briefing 21 April 2006

• FOMC minutes fuel new hope that end of tightening is near
• Political turbulence weighs on the greenback
• Precious metals move commodity currencies

Bad news for the dollar makes euro soar

This week, at just under 1.24, the euro hit its highest level for the last seven months. It dropped again to around 1.23, but not until the end of the week. The single currency also temporarily reached an all-time high against the yen at 145.49. The euro’s buoyancy was triggered mainly by weaker US economic data and renewed speculation that the end of the tightening process in the US could be imminent. In addition, the sustained commodities boom is triggering concern that inflation rates will continue to rise, which could prompt the European Central Bank in particular to be more aggressive in the further removal of its accommodative monetary policy than anticipated.

The release of the minutes of the FOMC meeting of 27-28 March had the biggest impact on the forex market. Most members agreed that the end of the tightening cycle was likely to be very near. Some members even expressed concern that given the lags in the effects of monetary policy, there was a danger of tightening too much. This led market participants to hope that the tightening cycle could already come to an end after the next interest rate hike on 10 May.

However, the FOMC members made it quite clear that future decisions taken by the Fed would depend on how growth and inflation data developed. The inflation data for March, which was released the following day, thus dashed the market’s hopes again. For the rise of the core inflation rate for US consumer prices was 0.3% month-on-month, which was higher than the market had expected. Moreover, in view of the sustained commodity price hikes, the situation is not likely to ease up in the coming months. It therefore remains to be seen whether the US data will in fact allow the Fed to end the tightening process.

In any case, crude oil prices have shot up by around 10% since the beginning of the month. This week alone, gold rose by 6%, before being hit by massive selling pressure towards the end of the week. The drop in precious metals’ prices had a temporary negative impact on the so-called commodity currencies too. Thus, after significant gains this week against the US dollar, the Australian and New Zealand dollars plummeted again. The crisis-ridden Icelandic krona began to stabilize. After substantial losses, the currency rallied again slightly at the end of the week.

The current commodity boom is caused by both the supply and the demand side. Thus tension has heightened again in the nuclear conflict with Iran: President Bush and Secretary of State Condoleezza Rice have threatened military action against Iran even without UN Security Council backing, if a diplomatic solution is not reached. Given this political background, the International Monetary Fund (IMF) thinks it conceivable that the oil price might reach $80 per barrel by the middle of the year. This forecast is based on solid global growth and thus continued high demand for commodities. The IMF economists expect growth to reach 4.9% this year and to only level off slightly to 4.7% next year. This is not much lower than the record growth in 2004.

The risk that high commodity prices pose to the world economy are also likely to be a focus of attention at the upcoming G7 meeting in Washington. The comments in the run-up to this event alone have already burdened the dollar. In the IMF’s opinion a reduction of the global imbalances cannot be achieved without a devaluation of the dollar. Moreover, the dollar also suffered from the overhaul of White House staff. Since the new chief of staff, Joshua Bolten, has taken over, it has been speculated that Treasury Secretary John Snow is also on the way out and that this could entail a change in the US exchange rate policy.

The next week is likely to be an easier one for the dollar. We do not expect the final communiqué of the G7 finance ministers and central bankers to bring any surprises. The Chinese government is unlikely to make any further concessions as to making the renminbi more flexible.

Next week’s releases of economic data will probably be positive for the dollar. US GDP is likely to have increased by around 5% in the first quarter and the Beige Book too will show US growth to be solid. After the steep increase in gasoline prices, markets will be watching the US consumer confidence figures very closely. So far the strong rise in commodity prices has hardly had any impact on consumer confidence. The ABC comfort poll even improved slightly last week.

For the euro area there will also be important data, above all the business climate. We do not expect the April figures to show any further increases Europe-wide, which might reduce the hysteria about possible ECB interest rate steps a little. Towards the end of week the focus will probably shift to Japanese monetary policy with the publication of the Outlook Report.

Uwe Angenendt 069 718-364.
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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