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Tuesday September 21, 2004 - 19:21:18 GMT
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Dollar Tanks Despite Fed Rate Hike

DailyFX Forex Fundamentals 09-21-04

By Kathy Lien, Chief Strategist of www.dailyfx.com

· Dollar Tanks Despite Fed Rate Hike
· Foreigners Sold European Assets On a Net Basis In July
· House Prices In UK Are Expected To Decline In The Months Ahead

EURUSD

The euro rallied approximately 70 pips against the dollar following the FOMC monetary policy announcement. As expected, the Fed raised rates by a quarter point with the statement indicating the central bank’s generally optimistic outlook on the economy and dovish outlook on inflation. The dollar sold off nonetheless as the market focused on the inflation aspect of the report (see USDCHF commentary for more on Fed decision). The Eurozone current account surplus fell from an upwardly revised EUR5.4 billion to EUR3.1 billion in the month of July. The data indicates that there was a net investment outflow of EUR38.7 billion, which reverses the EUR23.4 billion seen in June. The higher relative interest rates and stronger currency have not been a compelling enough reason for foreign investors to keep their money in euro denominated investments. We attribute this distaste for European assets on the region’s inability to garner attractive growth. Tomorrow we are expecting a significant number of European economic releases including German CPI, French Consumer Spending, Italian Consumer Confidence and Eurozone new industrial orders. Along with the global trend of falling inflation, core prices in Germany are expected to decline. Consumer appetite in France should grow modestly after slipping in July while Italian consumer confidence is expected to continue moving higher.

USDCHF

The Federal Reserve raised rates by a quarter of a point today to 1.75%. This is their third rate hike this year. As we have mentioned yesterday, the statement is the real market mover. Taking a side-by-side look at the current and previous statements, we see a number of notable differences. Overall, the Fed is more optimistic on the economy, noting that output growth has regained traction and the labor market has improved. This contrasts to the previous statement, in which the Fed said that output growth has moderated and the pace of improvement in the labor market has slowed. Given the rebound in payrolls, the Fed was generally expected to be more optimistic. With regards to inflation, the Fed said that inflation and inflation expectations have eased in recent months. This contrasts to their previous view that inflation has been somewhat elevated this year. It seems like a lot has changed since August. However, the Fed did maintain the word “measured” in their statement, indicating that they are not ready to jump the gun and get too excited about growth. Unfortunately, the Fed provided no clues to their policy intentions in November, leaving both bulls and bears unclear where they should position next. The move today is more indicative of the market tripping buy entry orders above the technical flag formation instead of actual bearish dollar developments.

GBPUSD

The pound is being led by the dollar today despite the release of pretty weak data last night. The RICS house price balance fell from +3 to –12 in August. This is the weakest reading in over a year and once again is another piece of evidence that shows that the housing market is indeed slowing. The Royal Institution of Chartered Surveyors also indicated that house prices will most likely continue to decline in the months ahead, but the slide lower should be limited given the tight labor market and generally healthy economy. The pound has been beaten down quite a bit so the sell off on the back of the weaker number was limited. Tomorrow, we are expecting the minutes from the September 8-9 monetary policy meeting. If you recall, the Bank of England kept interest rates unchanged at 4.75% earlier this month. Of most interest will be the breakdown of the vote - the decision is expected to have been unanimous.

USDJPY

Even with the Japanese back in the markets, there failed to be any notable movements in USDJPY. Last night, convenience store sales fell –0.9% in the month of August, which is actually not that bad since it follows a 6.8% gain in the previous month. Machine tool orders remained stable at 55.3%. The government also released a survey that indicates that the decline in land prices slowed for the first time in seven years. Although this is the 13th straight year of declines, prices in Tokyo have been increasing gradually. The OECD also upped their estimates for 2004 growth in Japan. The organization expects the Japanese economy to expand by 4.4%, up from their earlier estimate of 3%. The OECD expects Japan to grow by the fastest rate of the six industrialized countries (US, Germany, Italy, UK, France, Japan) that they cover in their interim GDP growth forecasts.

 

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