Monday, January 30, 2006
US Dollars' Fate Hangs On Interest Rates
Opinions are mixed on the interest rate front. "The dollar reached a four-week high against the yen on Monday, supported by expectations that the U.S. Federal Reserve will continue to raise interest rates even after an anticipated hike this week. Expectations are building that the central bank could keep raising after this week's gathering, helping to attract more investor funds to the dollar from lower-yielding currencies, especially the yen."
"'I still think the U.S. interest rate will be raised to 4.75 percent and above,' said a Tokyo-based trader at a Japanese bank. 'U.S. consumption is firm. So are U.S. stock and housing prices.'"
A Bloomberg columnist points out that the GDP news is worse than reported. "Even the pessimists were too optimistic on fourth-quarter growth, which slowed to 1.1 percent, less than half the consensus forecast and about one-fourth the third quarter's 4.1 percent pace. Not only was the increase in real gross domestic product the smallest in three years, but the composition wasn't so hot either. Inventories added 1.5 percentage points to GDP growth, which means that final demand (GDP minus inventories) fell for the first time since the first quarter of 2002."
"There's no debate over the trend in growth; the only question is the magnitude of the slowdown. Many analysts have been expecting capital spending to take up the slack as consumer spending slows. But fourth-quarter investment in equipment and software underperformed expectations, rising 3.5 percent, the smallest increase since the first quarter of 2003."
"The fourth quarter's 1.1 percent rise in consumer spending was held back by a 17.5 percent plunge in durable goods purchases, the biggest drop in almost two decades. The dive in automobile purchases alone subtracted more than 2 percentage points from GDP growth."
"'The fundamental and policy backdrop still suggest that both the growth cycle and the tightening cycle are in their very late stages,' Citigroup economists write in their Jan. 27 weekly. The interest-rate futures markets are still challenging that assumption. If history is any guide, they should come around to that way of thinking before the Fed."
"'I still think the U.S. interest rate will be raised to 4.75 percent and above,' said a Tokyo-based trader at a Japanese bank. 'U.S. consumption is firm. So are U.S. stock and housing prices.'"
A Bloomberg columnist points out that the GDP news is worse than reported. "Even the pessimists were too optimistic on fourth-quarter growth, which slowed to 1.1 percent, less than half the consensus forecast and about one-fourth the third quarter's 4.1 percent pace. Not only was the increase in real gross domestic product the smallest in three years, but the composition wasn't so hot either. Inventories added 1.5 percentage points to GDP growth, which means that final demand (GDP minus inventories) fell for the first time since the first quarter of 2002."
"There's no debate over the trend in growth; the only question is the magnitude of the slowdown. Many analysts have been expecting capital spending to take up the slack as consumer spending slows. But fourth-quarter investment in equipment and software underperformed expectations, rising 3.5 percent, the smallest increase since the first quarter of 2003."
"The fourth quarter's 1.1 percent rise in consumer spending was held back by a 17.5 percent plunge in durable goods purchases, the biggest drop in almost two decades. The dive in automobile purchases alone subtracted more than 2 percentage points from GDP growth."
"'The fundamental and policy backdrop still suggest that both the growth cycle and the tightening cycle are in their very late stages,' Citigroup economists write in their Jan. 27 weekly. The interest-rate futures markets are still challenging that assumption. If history is any guide, they should come around to that way of thinking before the Fed."
# posted by Ben Jones @ 8:37 AM 
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Currency investors looked past the GDP completely as USD gained. Did the Federal Reserve say something that I didn't hear? Do they think interest rates will keep notching up after tomorrow?
Maybe they are only reacting to tomorrow and not thinking about anything else.
Maybe they are only reacting to tomorrow and not thinking about anything else.
Finally listened to the "Petrodollar Warfare" interview on FSO. Very interesting!
The author convincingly asserts that the strength of the USD has been mostly attributable to the rising price of oil, not interest rates or relative economic strength. The higher the price, the more USD that foreigners have to hold to buy it, regardless of how the Fed juices liquidity.
If he's right, the Iranian Oil Bourse will sever the oil/USD link and take the wind entirely out of the USD's sails. Got gold?
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The author convincingly asserts that the strength of the USD has been mostly attributable to the rising price of oil, not interest rates or relative economic strength. The higher the price, the more USD that foreigners have to hold to buy it, regardless of how the Fed juices liquidity.
If he's right, the Iranian Oil Bourse will sever the oil/USD link and take the wind entirely out of the USD's sails. Got gold?
<< Home
