Wise Money sees a hint of a recovery in the US

The main focus yesterday was on the US and we saw some sign of recovery.

Stocks rebounded and closed up 276 points, 2.52%. Oil is down in value by 10% at just over $135 a barrel (if it comes down anymore maybe Mr Darling will change his mind and reverse his decision).

However, yesterday's prediction on US inflation was slightly lower than it actually was as they see inflation at its quickest in 17 years up 1.1% for the month at 5% year-on-year.

Indications from Bernanke and the FOMC minutes seem to be that inflation is going to take precedence over growth and that there would be rate hikes, though can we really expect to see them until 2009?

Today sees the US Initial jobless claims, expectations are an increase of around 40,000. We will also see US housing starts with the signs that both starts and permits are flattening. Not much else out today though tomorrow we will see German PPI.

In the UK today is the Debt Management Office Gilt auction.

On the currencies, the main focus is on the Greenback, Sterlings recovered yesterday down below $2 again and EUR/USD backed away from the 1.60 level and if we see it lower than 1.5760 we could see it much lower.

Three main reasons for the USD recovery; falling oil prices, intervention from the Fed and the FOMC minutes which indicated the view that rates may need to be hiked to curb inflation.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FED leave mortgage coalculator home loans rates Unchanged as expected

As predicted the Federal Reserve left the bench mark interest rate unchanged at 2%, ending the fastest series of rate reductions in two decades.

Although downside risks to growth remain, it appears that increasing inflation is becoming a greater concern. It has been said that this is a ‘baby step' in the direction of raising rates, as the FOMC leave their options open.

ECB President Trichet's comments during yesterday's press conference have cemented expectations that a 25bps rate rise in July is almost certain, with investors not ruling out the possibility of two rate increases this year, as inflation pressures have intensified in recent months.

Trichet told the European Parliament "€˜he did not envisage a series of increases, that being said, we never pre-commit. I said that we could increase rates by a small amount in order to secure a solid anchoring of inflation expectations'.

On the back of Trichet's comments we saw the Euro strengthen against the Dollar and the pound.

Oil dipped below $134 a barrel on Wednesday after reports showed that US Inventories had unexpectedly increased to 301.8m barrels in the week ended 20 Jun, against a forecasted decline of 1.1m barrels.

A report released by the US Energy Department yesterday has indicated that oil prices will decline to $70 a barrel by 2015 as new production begins in Azerbaijan, Canada, Brazil and Kazakhastan, however, it is predicted that this will be short lived as the price of oil will rise again to $113 a barrel by 2030 as the market remains relatively tight.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Gloomy housing data precedes Fed's home loans decision

The day before the US Federal Reserve is due to announce its decision on interest rates, figures released on Tuesday by the Conference Board reported that US consumer confidence has fallen to its lowest level in 16 years.

The index slipped to 50.4 in June, down from 57.3 in May and lower than the 56.5 predicted by economists. This was the sixth consecutive monthly fall in consumer confidence and is the result of a combination of factors including the ongoing housing slump, rising unemployment and soaring energy prices.

The crisis in the housing market is seen by many as being at the heart of the US economic problems and so news that the S & P index recorded a standout 15% decline in the prices of homes in 20 of the largest US cities during April, will only add to the shadow hanging over the US economy.

Former Fed Chairman Alan Greenspan argued in a speech yesterday that the US is still on the brink of a recession but that the actions taken by his successor in the first quarter of 2008 had reduced the risk of a “severe recession".

Whilst the market expects the Fed's current chairman Ben Bernanke to keep rates on hold today, his apparent support for a rate hike in August or September in order to contain inflation and strengthen the dollar, could be brought into question if further evidence emerges that the US is in the grips of a severe slowdown in growth.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

ECB comments dampen the euro

This morning the Euro has weakened against the dollar on the back of ECB comments yesterday that multiple interest rate hikes are unlikely.

In addition, InBev of Belgium's pending acquisition of Anheuser-Busch for $47bn may lend additional support for the dollar as the market anticipates InBev's USD requirement.

In the US, the Fed's beige book survey of data and information reaffirmed the weakening economic conditions stemming from softness in consumer spending, higher food and energy prices.

Corn prices have been on a run, continuing yesterday and giving support for other agricultural commodities. Oil prices continue to rise, moving up more than $5 a barrel yesterday. Globally, stock markets closed lower with the FTSE 100 index falling for its fourth consecutive day of losses.

As the market reassesses the interest rate structure for the euro, sterling has gained a bit of ground. In the UK however, economic data is dire with an increase in unemployment and the trade deficit and average earnings down fueling opinion that recession in the UK is very real possibility.

Economic data to watch for today is US retail sales figures out at 1.30pm and this afternoon Bernanke is speaking again. Tomorrow the G8 finance ministers are meeting in Osaka to reportedly discuss the rise of oil and food prices impact on the global economy.

Last of the most important announcements are the inflation numbers from the US on Friday afternoon. High readings will further support expectations for interest rate hikes from the Fed going forward.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bernanke's speech ignites Dollar jump.

After Europe's close we saw US Fed chairman Bernanke emphasise his concerns over inflation.

He stated the Fed would strongly resist an erosion in inflation expectations. This helped push the dollar to a three-month high against the yen (106.83). He also added that the latest surge in energy prices is adding to the dangers from inflation and that the risk of a substantial downturn in the U.S. economy has receded.

Wise Money also heard several other US officials saying they are keeping an eye on the dollar while keeping open the option of dollar-buying intervention to stem its slide.

This morning we have seen a release from the British Retail Consortium showing like-for-like retail sales have been the strongest in 4 months +1.9% y/y. Attributing warm weather for people splashing out on new clothes and summer food and drink.

This is the strongest reading since January this year,The BRC was proceeded by the RICS house price balance up at -92.9 in May from -94.7 in April. Also helping to painting a slightly brighter picture than of late in the UK economy.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK consumer confidence at lowest level since the end of Thatcher

U.K. consumer confidence dropped to the lowest level since Margaret Thatcher was ousted from office in 1990, as people became more pessimistic that the economy will slip into a recession, researchers GfK NOP Ltd have announced.

A gauge of sentiment declined 5 points from April to minus 29, the lowest since November 1990, the same month as Thatcher quit as prime minister.

Federal Reserve Bank of Dallas President Richard Fisher has said he expects the central bank would raise the benchmark U.S. interest rate should the public begin to expect greater gains in consumer prices.

Other Fed Bank Presidents, Gary Stern and Thomas Hoenig, have expressed growing concern this month about rising prices. Fisher, is the only member of the Federal Committee to dissent three times from the decisions to lower overnight bank-lending rate, favouring either no change or a less aggressive reduction.

With that the dollar is heading for a second monthly advance against the euro and the yen as rising stocks and "declining" crude oil prices brightened the outlook for the U.S. economy, the worlds biggest oil importer.

The Euro fell following retail sales in Germany unexpectedly dropped for a second month in April. This lead to speculation the German economy (Europe's largest economy) is losing momentum as faster inflation erodes consumers' spending power.

There seems to be increasing expectation that the Bank of England will add to interest rate cuts this year with growing concerns the UK economy is continuing to weaken.

On the currency front this has led to speculation that the U.K. currency will decline to 81 pence per euro in the coming months, the pound traded at 80.98 pence on April 16th, the lowest level since the euro's inception in 1999.

The Australian and New Zealand dollars fell this week on signs growth is slowing as prices of commodities the two nations export declined.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Minutes and Oil highlight Fed dilemma

Congratulations to Manchester United and commiserations to Chelsea after a superb European Cup Final in Moscow last night as the Reds invade Red Square.

Another 'close call' at the Federal Reserve who released the minutes of their April 30th meeting yesterday.

Their task in controlling the US economy is not an enviable one. The decision to cut rates at that meeting was certainly not unanimous with members highlighting ongoing inflationary concerns.

Yesterday's latest surge in oil prices hardly helps their cause. Oil surged past the $133 mark fuelled by fears of a global shortage. Policymakers at the Fed are going to find it increasingly hard to weigh up the dual mandate of controlling inflation by hiking interest rates and encouraging spending and growth by cutting them. The minutes showed that the Fed's easing bias is drawing to a close with a more neutral stance to come.

The Bank of England's Money Policy Committee faces the same dilemma. The minutes of this month's meeting showed the 9-strong team voting 8-1 in favour of keeping rates on hold. Blanchflower was the predictable dissenter voting for a cut.

They also showed that there was a general reluctance to cut rates at the moment so as not to be seen specifically targeting growth which could in turn have spooked the market about future implications for inflation.

Many analysts are now targeting November for the next rate cut.

Expect sentiment on this to shift as economic data drips through in the coming months.

The Euro was the winner on the currency markets again which was not only benefiting from uncertainty surrounding future Dollar and Sterling yields but had independent support from the IFO Institute's business climate index which rose to 103.5 in May from 102.4 in April.

The survey signalled that the German economy was showing strong resilience to the US slowdown. The single currency hit one-month highs against Sterling and the Dollar.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money growth v inflation debate continues

There was further evidence on Friday of the difficulty that the Bank of England face over near term base rate decisions.

UK Gross domestic product rose 0.4% in the first quarter, which is the slowest since the start of 2005. Year on year growth came in at 2.5%. Perhaps, support for the MPC members who voted for a reduction that is until UK consumers inflations expectations are taken into account.

A survey also released on Friday set a record high for a second consecutive month when it showed that consumers expect prices to rise by 3.8% in the next 12 months. So it could be that the sharp rise in inflation expectations makes the MPC think twice about lowering rates.

It seems that market participants are increasingly taking the view that the Bank of England may slow the pace of interest rate cuts as indicated by UK government bonds.

The yield on the 2 year gilt pushed to the highest level in four months over concerns for UK inflation and speculation that the worst of the credit crisis is over.

Possible credit market easing has led to the unwinding of safe-haven trades globally as investors move out of bonds and back to stocks. Particularly in Japan where yields on 5 year government bonds rose the most since 1999 after consumer prices soared 1.2% in March from a year earlier.

The Pound had been heading for a weekly drop against the dollar but managed a fight back on Friday as traders took profit on the possibly excessive move of the previous few days.

The UK currency has given up 4% against the dollar over the past six months and may remain under pressure on indications that the Fed may be nearing the end of its monetary easing cycle.

Market sentiment that the Federal Reserve will probably stop cutting interest rates also allowed the dollar to post its biggest weekly gain in a month against the euro.

This was despite US consumer confidence falling to a 26 year low amid fears of record gasoline prices and rising unemployment. The university of Michigan sentiment index decreased to 62.6 in April from 69.5 the previous month.

As we head into the week with the FOMC announcing its decision on the Fed Funds rate on Wednesday, futures contracts now show there to be a 24% chance the target rate will stay at 2.25% up from 2% a week ago.

The majority of the remaining probability is for a 25 basis point reduction.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FED cuts home rates to 4.25pc but recession feared

The Federal Reserve duly reduced its Funds Target Rate by 25bp to 4.25% but disappointed both the stock and bond markets by reducing its Discount rate by only the same margin (the discount rate is the rate at which the large American Banks can borrow from the Fed directly as ‘emergency funding’).

Wall St crashed off and the European bourses arrive this morning braced for a similar reaction. The USD on the foreign exchange benefited marginally from the less than hoped for cuts.

The Fed warned that recent economic data indicated a slowdown in the US economy as a result of "the intensification of the housing correction and some softening in business and consumer spending".

It added: "Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation." These comments differ markedly from those made by Fed Chairman Bernanke after last month's interest rate cut when he sounded a relatively upbeat note on the health of the US economy.

Then it was suggested that the greater risks came from inflationary pressures due to higher energy and food prices. But with no sign of recovery in the housing market since then and the banking system still not functioning under normal conditions, analysts believe the Fed has been preparing for a sharp downturn with more interest rate cuts expected and as such were dismayed that the Fed did not move more aggressively at yesterday's meeting.

One member of the Reserve Board argued for a full 50bp cut but was out-voted by the other 9 members held firm and the lesser cut was voted through.

One interesting development that has been reported this morning is the proposal being muted at the Fed to move away from operating a discount window to provide liquidity to the market and move towards an auction based system.

A discount window is where the Fed says, here is the price that we want to lend at, who wants it? An auction, would be where the Fed says, we want to lend this much, how much do you want to pay for it.

Basically it is a way of guaranteeing a quantity amount of liquidity injection. At the moment the discount window is being very underutilised. So yes, this is a fairly important innovation IF it is implemented……..

Away from the US, we saw better than expected UK trades (still a huge deficit and largely irrelevant to the market) and a weaker than expected German ZEW report which is much more worrying for the European outlook.

Little reaction in the forex markets on these pieces of data and as such the December doldrums do seem to be taking a firm grip on exchange rates. UK unemployment and wage data today at 9.30am is the first chance for some short term action and the perennially appalling US Trade data at 1.30pm is always good for currency gyrations – the market is expecting a shortfall on about $ 57.3 billion with import prices unchanged at +1.8%.

Of the other economies, the Norges Bank are today expected to RAISE Nowegian interest rates by 25bp to 5.25% which is the level that the Central Bank predicted would be the peak for the next 12 months. Recent inflation data however suggests that the tightening cycle is not yet over and that further increases could be necessary should inflationary pressures persist.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Currency converter sees strong US data

Earlier last week, the chance of a 25 vs. 50bp rate cut was close to fifty-fifty. Now, the odds for a half point cut are less than 25 percent because the payrolls figure was not bad enough to warrant a larger rate cut.

Managing expectations has become a big component of the Fed’s job these days whether they are willing to recognise it or not. If the market is pricing in a quarter point cut and the Fed under delivers by leaving rates unchanged, they risk triggering a sharp re-pricing of the yield curve.

If they over deliver by cutting interest rates 50bp, it could cause many people to wonder whether some bad news has yet to be discovered.

The Federal Reserve’s interest rate decision has the power to shift the trend in the market, but they will probably contain volatility by releasing a more cautious FOMC statement that points out the risks of both growth and inflation.

If the Fed fails to give the markets the clarity that it needs, producer prices, consumer prices and retail sales will. If inflation and spending remains strong, then the recession story gets shelved for the time being and the dollar could see a short term recovery.

The other releases that we are also expecting are pending home sales, the US trade balance, import prices and industrial production.

Is the European Central Bank just talk or will they actually follow through with an interest rate cut?

Unfortunately, this question will not be answered until the next ECB meeting on January 10th at the earliest. With each passing day however we have more reason to believe that the ECB could actually make good on their threats.

On Friday, German industrial production was stronger than expected while the OECD leading indicator for the Eurozone remained unchanged at 98.4. Even the Eurogroup which has previously called for the ECB to step in and stop the Euro from rising now says that the economy is proving resilient in the face of shocks.

In the week ahead, we do not have many important pieces of data other than the German ZEW survey, which has been losing its market moving potential because it has repeatedly called for a slowdown that has yet to unfold. This means that US data will probably dictate the movements in the EURUSD.

Meanwhile aside from the Federal Reserve, the Swiss National Bank also has an interest rate decision. They are widely expected to leave rates unchanged, but there is a risk for a surprise rate hike or at least hawkish commentary from the SNB.

GBP

The British Pound recovered for the second day in a row which says a lot because it comes on the heels of the first interest rate cut in two years.

The futures market is still pricing in 50 to 75bp of easing next year and if expectations are correct, then the pound should continue lower. However there are often retracements within a broad downtrend and we expect to see one at the beginning of this week.

Before Tuesday’s FOMC meeting, we are expecting producer prices and the trade balance. The UK trade deficit should improve because the export component of manufacturing PMI accelerated last month.

We already know that inflation is a problem because the latest monetary policy statement talked up the risks to short term inflation. However anything goes after the FOMC meeting because the US rate decision could shift the near term outlook for many currency pairs. On Wednesday we also have UK employment data which we expect to be pound bearish.

Prices at the London open
GBPUSD – 2.0321
GBPEUR – 1.38.73
EURUSD – 1.4649
GBPJPY – 226.64
GBPCHF – 2.2936
GBPAUD – 2.3133
GBPCAD – 2.0390
GBPZAR – 13.6596

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Currency converter calm on quiet data

Major currencies remained in narrow trading ranges, with a dearth of data meaning focus was on global currency imbalances and credit worries.

The dollar is hovering around a cent off its all-time low against the euro and its weakness is causing some friction within major exporters such as China.

Chinese Premier Wen Jiabao pledged on Monday to resolve trade imbalances after the country's surplus hit a record high in October, and to work to let the yuan move more freely.

A stronger yuan would make Chinese exports more expensive overseas. Wen said China will work to "increase (the currency's) flexibility and gradually make the yuan convertible under the capital account".

However European Central Bank president Jean Claude Trichet, speaking at the meeting of central bankers in Cape Town, refused to make any specific comments on the strong euro.

Instead he reiterated previous comments that "excess volatility in currency markets is undesirable". EU economic commissioner Joaquin Almunia made similar comments later in the afternoon saying that the euro's recent moves may be brutal but fundamentals are the ultimate factor in respect to free market volatility.

Later this week, attention should switch back to fundamentals. The minutes to the US Federal Reserve Oct 31 rate decision come today and investors will be looking for any signal that borrowing rates will come down again in December, following a quarter-point cut at the Oct 31 meeting.

With the market relatively confident about the prospects for a rate cut in December, the risk is these expectations will be disappointed somewhat, which would be positive for the dollar and negative for risky assets.

The pound recovered slightly after dropping following more gloomy news on the UK housing market. The latest Rightmove house price survey showed the average asking price was 0.7 % lower in November compared to October. In the UK the main focus later this week will be on the Bank of England's minutes to its rate decision earlier this month.

The central bank left rates unchanged at 5.75 % but the subsequent, surprisingly dovish Inflation Report, along with weak housing indicators, has raised expectations for a cut in the coming months. Investors will be keen to see whether the Monetary Policy Committee was divided in its decision.
Prices at the London open
GBPUSD – 2.0557
GBPEUR – 1.4000
EURUSD – 1.4698
GBPJPY – 226.96
GBPCHF – 2.2920
GBPAUD – 2.3145
GBPCAD – 2.0140
GBPZAR – 13.7903

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Mixed data wobbles currency converter

The dollar was steady in the wake of a raft of conflicting data, headlined by sturdy inflation figures that will exacerbate the dilemma for the Federal Reserve Bank as the economy shows signs of slowing.

US CPI inflation met expectations with a rise of 0.3 % in October from September, giving a 3.5 % annual rate, the highest in 14 months. Strong inflation will make it harder for the Fed to cut interest rates again, following its 0.75 points worth of reductions since September, even though economic growth is expected to slow sharply in the coming quarters.

The monthly increase in inflation is actually the calm before the storm, inflation could hit a 16-year high of 5.0 % by the end of the year as gasoline prices continue to rise.

Jobless claims also painted a gloomy picture for the economy. Data showed there were 339,000 new claims for the week ending Nov 10, up 20,000 from the prior week and higher than expectations for a broadly unchanged reading.

On the flipside, the New York Fed's manufacturing survey for November suggested business conditions remained firm in October, with the reading dipping to 27.37 from 28.75 in October. Expectations were for a sharper pullback to 19.00.

Elsewhere, the UK currency suffered particularly badly against the euro, which hit a four-year high of 0.7166 stg shortly after the data were released. Retail sales fell by 0.1 % in October from September, the first monthly fall since January and confirming the widespread belief that UK consumer spending is on a firm downward trend.

After Wednesdays dovish Bank of England inflation report, which all but confirmed that two UK interest rate cuts will be forthcoming next year, the weak figures will add to speculation that the first move could come as early as next month.

The BoE's position contrasts with that of the European Central Bank, which has defiantly maintained its anti-inflationary stance despite the economic slowdown in the region.

Prices at the London open
GBPUSD – 2.0406
GBPEUR – 1.3997
EURUSD – 1.4586
GBPJPY – 224.54
GBPCHF – 2.2943
GBPAUD – 2.2993
GBPCAD – 2.0079
GBPZAR – 13.4263

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Weak dollar under pressure from FED comments

The dollar sank across the board, hitting a new 26-year low against sterling, in the immediate aftermath of comments from US Federal Reserve Bank chairman Ben Bernanke.

The central bank chief said the Fed is ready to counter the inflation risks caused by high oil prices, suggesting US rate-setters will be reluctant to lower interest rates further despite some signs of slowing growth.

Further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity. There is no Goldilocks scenario from Bernanke who sees risks from inflation and an economic slowdown, the worst of both worlds.

Currency markets have been expecting the Fed to cut interest rates again in December, following reductions in the Fed Funds rate totaling 0.75 percentage points since the summer.

The central bank has said these cuts, bringing the benchmark rate to 4.50 %, were a pre-emptive move to stave off an economic slowdown as the housing market continues to decelerate and financial markets slowly recover from their turbulent summer.

Despite Bernanke's hawkish undertones, however, the dollar fell as markets appeared to focus on the negative economic tone of the speech. The US currency fell across the board, sinking to 2.11 against the pound, a new low since 1981.

The Pound had already strengthened to new dollar highs yesterday, after the Bank of England held rates at 5.75 %, quashing a growing minority view that it could reduce borrowing costs following a weak run of data. Nonetheless, analysts are convinced the next move in interest rates will be down, and some are speculating on a cut as early as next month.

With the economy facing the headwinds of previous interest rate hikes, considerable sterling strength, tightening credit conditions and rising energy costs, we see no need for the repo rate to remain at the present restrictive level of 5.75 %.

Mortgage calculators expect the first 25 basis point ease by February at the latest, with the clear risk that the BoE could begin as early as next month if leading indicators continue to soften rapidly.

The European Central Bank also held rates, at 4.00 %, a decision fully expected by markets. Most analysts believe the central bank will keep rates unchanged for some time as it tries to balance increasing euro zone inflation pressures with slowing growth.
Prices at the London open
GBPUSD – 2.1093
GBPEUR – 1.4367
EURUSD – 1.4680
GBPJPY – 237.38
GBPCHF – 2.3757
GBPAUD – 2.2789
GBPCAD – 1.9610
GBPZAR – 13.4263

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FED interest rate cut to 4.5 pc hits Dollar and boosts Sterling

The US dollar skidded to a new low against the euro yesterday while the British Pound broke through $2.08 after the Federal Reserve lowered a key interest rate by a quarter percentage point to 4.5 %.

The Canadian currency bought more than $1.60 for the first time since 1957. The 13-nation euro soared to $1.4503, its fourth new high in as many trading days, while the British pound bought $2.0813, after having hit a high of $2.0822

The Fed's statement was intended to signal a continued openness to cutting rates, while indicating that inflationary pressures made doing so risky. Although lower interest rates can jump-start an economy, they can also weaken a currency as investors transfer funds to countries where their deposits and fixed-income investments bring higher returns.

Currency traders are not buying into the relative hawkishness cropping up in this month's statement. While the outlook for the Fed is between further rate cuts and no rate cuts ... rates will remain unchanged if not go up for foreign banks, causing currency traders to drop the dollar.

The rate-cut announcement, while expected, drove the dollar down, even as new U.S. data showed the economy grew at a 3.9 % pace in the third quarter, the fastest pace in 1 1/2 years. A second report showed that construction spending rose 0.3 % in September, the best showing in four months.

The euro, the Canadian dollar and the Pound have been climbing steadily against the dollar, regularly touching new highs since August amid fears for the health of the U.S. economy, stoked by the subprime credit crisis.

The euro has been helped by sentiment that the European Central Bank has yet to finish a gradual campaign of rate increases, while the pound has benefited from expectations that the Bank of England will leave rates untouched rather than follow the Fed in cutting the cost of borrowing.

The Canadian dollar, a commodity-backed currency, has benefited as oil prices soared and demand for Canada's exports increases.

In other trading, the dollar rose against the Japanese currency, climbing to 115.31 yen from 114.77 yen. However, the dollar slid against the Swiss franc to 1.1565 from 1.1600. Rates remain on hold at 0.5% in Japan.
Prices at the London open
GBPUSD – 2.0801
GBPEUR – 1.4373
EURUSD – 1.4468
GBPJPY – 240.22
GBPCHF – 2.4102
GBPAUD – 2.2286
GBPCAD – 1.9658
GBPZAR – 13.4263

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Weak US data worries currency converters

The dollar was back near record lows against the euro after more weak data emerged from the US, this time showing that consumer confidence continues to wane.

The latest piece of data adds to an already strong case for a US rate cut this afternoon. A quarter-point reduction to 4.50 % is fully priced in but expectations of a larger 50 basis point cut is growing steadily.

At the last meeting, in August, US rate setters cut rates by half a point to 4.75 %. Still, most analysts believe the larger cut tooday is very unlikely given the seeming calm in credit markets and the spike up in oil prices above 90 usd a barrel.

Data out this yesterday showed consumer confidence falling to a two-year low in October as consumers became increasingly worried about the job market and deteriorating business conditions.

The New York-based Conference Board said its Consumer Confidence Index fell to 95.6 from 99.5 in September. That was its lowest level since the post-Hurricane-Katrina reading of 85.2 in October of 2005.

It appears that while the Fed's September rate cut helped to stabilise confidence, it was unable to keep it from deteriorating further following the August liquidity crisis.

Before the rate verdict, US third-quarter GDP data is due and a 3.0 % annualised rise is expected. The dollar may well enjoy a relief rally if the data comes in as expected and US rate setters deliver a quarter point cut to 4.50 %. From then on, however, the dollar's woes may well resume.

Elsewhere, the pound was in the ascendancy against the dollar, rising to a new 26-year high following further hawkish comments from a key swing voter on the Bank of England's rate-setting body.

Earlier, Sterling rose to its new 26-year high of 2.0693 usd. Kate Barker, one of nine members of the Monetary Policy Committee, said there is little evidence that there has been a major change in peoples' attitudes following the recent financial turbulence.

Speaking during a visit to Guernsey, Barker questioned whether things have changed enough to warrant a fall in borrowing costs, according to an article on The Guernsey Press and Star website.

The Swedish krona rose after the Riksbank raised its key repo rate by 25 basis points to 4.00 % as expected and reiterated that rates will need to rise again during the first half of next year.

Explaining the move, the central bank cited strong growth and rising employment levels, as well as "rapid" increases in lending and house prices, which are leading to a rise in inflation expectations.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US Dollar- the pain continues...

The US Dolar was hit hard on Friday and in Asian trade this morning as expectations of a rate cut on Wednesday night continues to rise.

The market has completely priced in a 25bp cut from 4.75% to 4.50% while a 50bp cut is given a 55% probability. Although, it may not be a forgone conclusion as the Fed does not like to be pressured into a decision by the markets.

The USD slid to new all time highs against the EUR (can you still remember when following the launch in 2000 they were hoping it would get back to parity?) while the commodity and high interest yielding currencies of the CAD and AUD hit 33 and 23 year highs respectively.

Moreover the Dollar index, the value of the USD against a basket of six major currencies, hit its lowest level since inception 30 years ago.

Commodities also benefited from the weaker USD with Oil climbing to yet another record high, breaching $93 a barrel, while gold hit a 27 year peak at $794.40. Significantly oil has breached its highest inflation adjusted price for the first time since the Iran cut exports way back in 1980.

The GBP has also benefited from the weaker USD hitting new highs, however the gains have not been as dramatic as the EUR and AUD with the expectations of rate cuts in the UK restricting gains.

The possibility of a rate cut in the UK is in contrast to others like the EUR and AUD where increases are expected by early next year if not early.

With the GBP not increasing as much as other currencies against the USD the GBP crosses have fallen. GBP/EUR has slipped to key support just above the low seen in April 06. Against the AUD and CAD the GBP has sunk to levels not seen since the late 90s.

Expect the currency markets to remain volatile until the Fed announcement on Wednesday with a clearer trend likely to emerge after.

Most of the focus will be on the Fed announcement on Wednesday but there is also a string of other data due this week.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FED slashes rates to head off slowdown

Stocks surged after the US Federal Reserve moved aggressively to head off the risk of asharp slowdown in the US economy yesterday by cutting interest rates 50 basis points to 4.75 per cent.

The Fed said the rate cut was to "help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets". It was also intended to "promote moderate growth over time".

It also cut the discount rate at which the US central bank lends directly to banks by 50bp and held out the possibility of further interest rate cuts to come.

Tightening in credit conditions had the potential to "intensify the housing correction and to restrain economic growth more generally", the Fed said.

Hinting at possible further easing, the Fed said market dev-elopments had "increased the uncertainty surrounding the economic outlook".

It would "continue to assess the effects of these and other developments" and "act as needed" to pursue its dual objectives of stable prices and sustainable economic growth.

The S&P 500 index was up2.14 per cent at 1,508.29, after having been higher by about0.5 per cent in early afternoon trade. The financial sector led the gains.

The dollar set a new record low of $1.3964 against the euro, while interest rate futures continued to price in more rate cuts over the next 12 months, with the three-month rate, seen at 4.28 per cent by September 2008, down from 4.45 per cent early in the day.

Bond yields diverged as the yield on the policy-sensitive two-year note plunged 11bp to3.95 per cent, while the yield on the 30-year bond rose sharply.

The long bond yield rose to4.8 per cent from 4.74 per cent. Gold prices rose to a 26-year high of $733.40 an ounce. Oil also hit a record high in the US.

Core inflation, the Fed observed, had "improved modestly this year" - a significant shift since the previous meeting, when it believed a sustained decline in inflation had not yet been "convincingly demonstrated". But "some inflation risks remain" and the committee pledged to "continue tomonitor inflation developments carefully".

This reference is a reminder that, while no policymakers formally dissented from yesterday's decision, a number of officials remain worried about inflation.

Opting for an aggressive 50bp cut rather than an incremental 25bp reduction reflects the Fed's reluctance to fall behind at a time when the economic outlook is evolving rapidly.

Officials are anxious to act pre-emptively to reduce the risk of a severe slowdown that could turn into a recession, even though there is little evidence to date that the economy is approaching such a tipping point.

To the extent that they are able to reduce the recession risk, their actions should helpstabilise financial markets, in particular the market formortgage-backed securities.

Some of the most senior officials favoured a 50bp move to create a positive psychological effect on the markets.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.