Wednesday, June 21, 2006

 

Economy Over-Shadows Rate Hikes For US$

Bloomberg reports that a looming economic slowdown is beginning to hurt the US dollar. "The dollar declined for a second day on speculation further interest-rate increases by the Federal Reserve will cool growth in the world's biggest economy. The currency extended its slide this year to 2.6 percent against the yen and 6.1 percent versus the euro before economic reports tomorrow that will probably add to signs of a slow down."

"'Amid growing concern about the slowing U.S. economy, the dollar seems to be losing momentum,' said Saburo Matsumoto, a strategist at Japan's third-biggest lender by assets. 'The interest-rate differential alone isn't enough to push the dollar higher anymore.'"

"The dollar fell to 114.79 yen as of 3:19 p.m. in Tokyo from 114.96 yen late in New York yesterday. It dropped to $1.2619 per euro, from $1.2579, the biggest fluctuation of any currency today. The dollar may reach 110 yen in a month, Matsumoto said."

"The number of Americans filing first-time claims for unemployment benefits probably rose to 305,000 last week, after falling to 295,000 in the week ended June 10, the median forecast of 35 economists in another survey showed. The Labor Department releases the data at 8:30 a.m. tomorrow in Washington."

"'The economy appears to be slowing, and the trend is for dollar weakness,' said Nobuo Ibaraki, deputy general currency manager in Tokyo at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. 'The data may be weak.' The currency may fall to $1.2650 against the euro and to 114.20 versus the yen today, Ibaraki said."

"The Conference Board's leading index, which forecasts the economic outlook for the next three to six months, fell 0.5 percent in May after dropping 0.1 percent April, according to the median of 53 estimates in a Bloomberg News survey. The New York-based group releases the data at 10:00 a.m. tomorrow."

"The U.S. economy will expand at an annual 3 percent rate from April through June, down from a 3.5 percent estimate last month, according to the median forecast of 70 economists surveyed from May 30 through June 7."

Comments:
If this sentiment takes hold, it could be a huge turning point for all currencies. It seems like all central banks are raising rates, but not all economies are on such thin ice.
 
Presents these countries with an interesting choice... do they get caught up in "global competitive devaluation" or not?

Either way, good for gold!
 
This is the "damned if you do, damned if you don't" nightmare the Fed's been afraid of. They're raising rates in a desperate effort to save the dollar, only to find that the resulting fears of a slowing economy are actually hurting the dollar. Not too many other places to turn now...
 
Soho,

Dollar bears always knew the Fed was painting themselves in a corner. The information is now leaking into the general investor population.
 
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