Dollar Falters in Wake of FOMC Statement

September 22, 2010

The dollar has lost 1.3% against the Australian dollar, 1.0% against the euro, 0.8% versus the Swiss franc, 0.7% relative to the Canadian dollar, 0.6% against the kiwi, 0.5% versus the yen and 0.3% relative to sterling.  The yuan did not move overnight against the dollar.

The German Dax and Paris Cac are 0.8% weaker in response to the euro’s advance.  In the Pacific Rim, stocks fell by 0.6% in Pakistan and Indonesia, 0.4% in Japan and 0.3% in India but firmed 0.3% in South Korea and China, 0.2% in Australia and Hong Kong, and 0.1% in Taiwan.  Just as sterling has lagged the gain of the euro, the Ftse (off 0.3%) has not dropped as much as stocks in Euroland.

Ten-year British gilt and German bund yields have plunged 14 and 10 basis points.  Treasury futures indicate a 12-basis point decline of the 10-year yield compared to the time of the FOMC announcement on Tuesday afternoon.  The 10-year JGB yield is only two basis points lower, by comparison.

Gold shot up over $20 to a new record high and is up 1.6% on net at $1294.90 per barrel.  The Swiss franc, sometimes called paper gold, hit a 17-month high of 0.9872 per dollar.  Oil prices recovered 0.8% to $75.57 per barrel.

The euro strengthened in spite of data showing a 2.4% decline of euro area industrial orders in July, wiping out June’s increase and leaving the level just 0.5% higher than the second-quarter mean.  Orders had soared 36.2% at an annualized pace in the spring quarter, but July’s setback, which was led by a 5.1% drop in capital goods, points to slower activity growth in the second half of 2010.  Orders in July were 11.2% greater than a year earlier, down from on-year growth of 22.7% in June.  In comparisons of July to June, orders fell by 2.6% in Germany and Portugal, 5.4% in Greece, 3.2% in Italy, and 2.0% in Spain.

Like Tuesday’s FOMC statement, minutes from the Bank of England’s September 8-9 meeting was more dovish than expected.  While big upside as well as downside risks surround expected inflation, such hasn’t moved much.  Several policymakers, however, feel that the probability has increased for further necessary action to stimulate growth and keep inflation on track in the medium term.  Andrew Sentance, Tom Hoenig’s counterpart at Britain’s central bank, again dissented from the 8-1 majority decision to leave the Bank Rate at 0.5%.  Sentance, as at earlier meetings, expressed concern about persistent above-3% CPI inflation and preferred a 25-bp rate hike.  The vote to retain a GBP 200 billion ceiling on the asset purchase plan was 9-0.

Iceland’s central bank benchmark rate was cut by another 75 basis points to 6.25%.  Icelandic wages were flat in August.

Dutch consumer spending posted only an insignificant 0.2% on-year rise in July. Danish consumer confidence was lower than anticipated in September.  Norwegian unemployment fell to 3.3% in June-August from 3.6% on average in March-May.  Later today, the Norges Bank will announce its interest rate decision; the 2.0% benchmark level probably will not be modified.

Hungarian retail sales posted their first on-year real increase (1.7% in July) in over three years.

Japan’s all-industry index, a supply-side GDP proxy, advanced 1.0% in July, slightly more than forecast, and was 1.1% above the 2Q mean level.  The gain from July 2009 was 3.1%.  In comparisons of July from June, services rose 1.6%, while industrial output, public spending, and construction were off 0.2%, down 0.2% and unchanged, respectively. 

Australia’s index of leading economic indicators rose 0.4% in July, resuming its 14-month-long underlying uptrend after a 0.1% dip in June.

New Zealand’s current account deficit of NZD 880 million last quarter was much larger than in 1Q or than analysts were expecting, and such equaled 3.0% of GDP.

Malaysian consumer prices in August were 2.1% greater than a year earlier.

South Africa recorded a smaller-than-forecast current account deficit of ZAR 66.9 billion last quarter, equal to 2.5% of GDP.

The Hong Kong Monetary Authority as is customary left its key interest rate steady, matching the FOMC’s decision.

Canadian retail sales and index of leading economic indicators arrive today.  So does the U.S. FHFA index of house prices and the preliminary estimate of Euroland consumer confidence in September.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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