Items Tagged With rates

The US dollar regained some strength following buying by Japanese institutional investors. Chuo Mitsui Trust and Banking forex dealer Yasuhisa Ishida said that other reasons for the firming of the dollar were that no surprise developments were expected on China's foreign exchange policy, and the belief that the upcoming G7 summit would refrain from discussing the widening trade imbalance between the US and China. The Chinese President is on a visit to the US currently. Forbes.com reports:

"In addition, although the dollar was sold recently due to fading expectations of continued interest rate hikes in the US given solid economic fundamentals and rising crude oil prices, I think there is the chance that US interest rates may rise beyond 5 pct," Ishida added.

According to a variety of economic indicators, Japan is now the fastest growing economy in the G8 Industrialized countries. Further, it seems Japan has definitively succeeded in ending a decade-long deflationary spiral, during which its nominal GDP declined. Japanese economists have hinted that the Bank of Japan may soon end its ultra-loose monetary policy. This move, which will take the form of higher interest rates, has even received the support of Japanese politicians, who previously seemed ambivalent. While the rate hikes will not occur for a couple of months, currency traders are already beginning to buy Yen based on the prospect of a narrowing interest rate differential between Japan and the rest of the developed world.

Read More: Policy hope propels yen’s rally

It was a good day for the British pound as the Bank of England (BoE) ruled out possibility of interest rate cuts in the near future. An inflation report by the BoE indicates inflation will stay within bounds for the next couple of years. It was a relief for the traders who had been affected by recent uncertainty over interest rates as BoE members disagreed during board meetings over the stance to be adopted.

As a result the pound gained 0.3 percent. Interest rates in UK are on par with those in the US at 4.5 percent. High energy prices have been a major factor in pushing up inflation globally and the UK is no exception. A report by the BoE also indicated the region’s GDP might increase slightly in the next few months.

Any doubts over the short-term future of American monetary policy have been sufficiently erased, as the strong economic data foreshadow a rate hike at next month’s Fed meeting. Economists were previously unsure as to whether the US economy could support an additional rate hike. By some approximations, however, the economy is as strong as it was in the late 1990’s. On a seasonally-adjusted basis, retails sales data recorded the largest monthly increase in over five years. Accordingly, it looks like Ben Bernanke’s first task as new Chairman of the Federal Reserve Bank will be to raise the federal funds rate to 4.75%. AFX News Limited reports:

Analysts said the data provided further evidence that the US labour market is strong enough to warrant at least one more Fed rate hike, in contrast to expectations last month that the central bank was about to end its policy of raising rates.

In the last few months, a whole host of economic indicators have confirmed both that the Japanese economy is on solid footing and that the era of deflation has finally passed. Accordingly, many economists and analysts predicted that Japan would soon end its ultra loose monetary policy where real interest rates where kept below zero. In the last few days, however, currency traders have been working overtime to rid their models lofty rate hike expectations. The cause of the uncertainty has been the Bank of Japan, itself, which has insisted that it will continue to hold short term interest rates to below .1%, and long term rates to a proportionately low level. The Financial Times reports:

Reports suggested the BoJ will continue to pump liquidity into the economy by buying Y1,200bn worth of government bonds a month to keep long-term rates capped. “This would help…reduce market turmoil, including speculative yen buying.”

According to a senior member of the European Central Bank (ECB), the bank may raise interest rates at its next meeting, which is currently scheduled for June. As you may recall, there was a frenzy of speculation that surrounded the Bank's last meeting, as many analysts had expected a rate hike. According to the official, however, the ECB merely wants to wait and confirm that actual growth and inflation figures accord with expectations. In short, it seems the ECB is in the process of tightening its monetary policy, but the pace may be a little slower than usual. Bloomberg News reports:

With the Federal Reserve also tightening credit and the Bank of Japan likely to do so before the end of 2006, the world economy faces the first round of synchronized rate increases in six years.

For the better part of a year, the Australian Dollar (AUD) has remained relatively constant in value, hovering around .75 USD. Economists and analysts have identified several factors that are preventing the AUD from moving by pulling the currency in opposite directions. On one hand, commodity prices and Australian economic fundamentals continue to perform strongly, which would seem to drive the AUD upward. On the other hand, the interest rate differential between the US and Australia has narrowed to only 100 basis points, which may not be enough to bring the capital of risk-averse foreigners to Australia. By the same token, many investors are moving funds to New Zealand, where interest rates exceed 7%. The Sydney Morning Herald reports:

All told, last year saw the lowest degree of variability in the Aussie's value in any year since the float in December 1983.

In the days and weeks leading up today’s meeting of the European Central Bank (ECB), the Euro had begun to gather steam as traders and analysts braced for the bank to signal a rate hike in May. Such a move would be a step towards reducing the differential between European and American interest rates. Jean-Claude Trichet, president of the ECB, had a different agenda, however, delicately warning investors not to expect such a rate hike. Analysts quickly reconfigured their models, hoping that the rate hike will merely be postponed by a month, rather than cancelled. The Financial Times reports:

Market expectations still point to rates of 3.25 per cent by the end of the year, but whereas this was a 100 per cent certainty before Mr. Trichet’s comments, the probability fell to 80 per cent afterwards.

The consensus among economists is that Japan has clearly emerged from a decade-long recession, which is a conclusion predicated on a bevy of economic data. The Bank of Japan is now in the unenviable position of having to raise interest rates to head off possible inflation, without shocking the economy back into recession. In a recent poll, a majority of economists indicated their belief that the rate hikes will be effected before the end of the year. While the Yen may not derive direct support from the rate hikes, it will likely benefit from an inevitable decline in carry trades, in which currency traders borrow Japanese Yen to finance purchases of other currencies. Reuters reports:

“Japanese rates are still going to remain extremely low - below 2 percent next year -- and it will still be the lowest, notwithstanding the Swiss franc.”

Inflation in Germany for March was at its lowest since August 2005. The rate of inflation was 1.9 percent as against 2.1 percent in February. Inflation in Germany has stayed above the European Central Bank’s 2 percent target for the past six months. Economists had predicted such a possibility in Europe’s largest economy.

The ECB has raised interest rates twice in the past six months and indicated it will take decisions according to the way the economy of the region shapes up. The central bank is pegged to hike rates to at least 3.25 percent this year. Meanwhile, producer price inflation in Germany for February accelerated unexpectedly to its highest in 24 years. Gas prices have risen at an average of almost 20 percent more than last year.