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FX Briefing: Dollar plummets
FX Briefing 24 November 2006
â€˘ Euro surges over 1.31 in thin trade, highest level since April 2005
â€˘ Dollar risks in foreign currency reserves resurface
The US dollar has dropped significantly in thin trade because of public holidays in the US and Japan. After rising over 1.29 on Thursday, the euro then surged over 1.30 on Friday morning. This evidently triggered numerous buy orders,which pushed the euro up as high as 1.3110 at times. Before the abrupt movement on Friday, investors seemed to have been increasingly unwinding carry trades: the gains of low-yielding funding currencies such as the yen and the Swiss franc were significantly higher than those of high-yielding currencies.
But Fridayâ€™s movement was predominantly a movement into the euro and the European currencies. Remarks made by a deputy governor of the Chinese central bank might possibly have played a part. He warned that the high Asian foreign currency reserves are exposed to increasing risks of a dollar depreciation. The PBoCâ€™s maturing and potential new currency swaps to mop up renminbi liquidity are also making market participants in Asia nervous. Whereas most European currencies gained more than 1% over the previous day, the yen rose by a mere 0.5%; major Asian currencies like the Korean won, the Singapore and the Taiwan dollar actually lost ground against the dollar. At the end of the week, USD-JPY was just under 116, while EUR-JPY was back to 151.40 again â€“ just slightly below the all-time high of the beginning of the week.
The reasons for these strong movements are not quite clear. Admittedly, what data there were from the US were on the weak side, but slight revisions to the University of Michigan index or an increase in initial jobless claims of about 12,000 do not normally cause economic pessimism. In Europe, private consumption in France and the Ifo business climate index in particular turned out surprisingly positive. The data confirm the already positive estimate for the fourth quarter; but they are no reason for a complete reassessment of monetary policy in the eurozone. In November, inflation in Germany accelerated somewhat. However, this is mainly due to basis effects (the previous yearâ€™s basis is lower than Octoberâ€™s because of the decline in energy prices). Month-on-month, the price development in November is quite unremarkable.
Next weekâ€™s indicators such as durable goods orders and home sales hold a few risks in store. As both the NY Empire State and the Philly Fed index improved in November, there is no particular reason to be sceptical about the Chicago PMI and the ISM Index. Although, the Chicago PMI has often been known to cause a surprise. However, we are expecting the Fedâ€™s Beige Book forecast to be relatively positive, particularly with regard to private consumption. The assessment on inflation is likely to be favourable, but it should again be underlined that the high level of employment and wage increases pose an inflation risk. Personal spending data, due to be released on Thursday, will probably only have risen slightly in nominal terms, but in real terms it should have increased more markedly (0.3 to 0.4%). Thus in the fourth quarter, an increase ofabout 3% annualized quarter-on-quarter (similar to Q3) would be quite possible.
In its last statement, the ECB put the strong increase in money supply into perspective: it pointed out that growth momentum for the more liquid components of money supply was slowing, and that private loans were stabilizing. We estimate that it could have accelerated from 8.5 to over 9% in October Interest rates, lively credit growth and sustained foreign interest in European bonds all speak for robust money supply growth:. However, the liquid components of M3 will have once again accelerated the most. Like in Germany, the inflation rate in the EMU is expected to have risen in November from 1.6 to around 1.9% due to basis effects. However, as price
momentum is still weak, our favourable consumer price scenario remains valid. All in all, we are expecting the ECB to go into stand-by mode after Decemberâ€™s interest rate hike.
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
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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