Business | Markets
Dollar likely to fall as investors expect another Fed rate cut
More dollar weakness is expected as the market expects financial institutions to continue to suffer from the credit crisis, the effects of which could spread to the wider economy.
- Special to Gulf News
- Published: 01:06 December 2, 2007
- Image Credit: Reuters
- The strong versus the weak: euro notes and US dollars displayed by a currency dealer.
More dollar weakness is expected as the market expects financial institutions to continue to suffer from the credit crisis, the effects of which could spread to the wider economy.
In view of the current signs of economic weakness, investors believe this may prompt the Federal Reserve to cut its benchmark interest rate by 25 basis points from 4.5 per cent this month after chopping it by a total of 75 basis points since September.
Euro
The euro started last week by falling about 0.2 per cent after hitting a record high of $1.4968 the previous Friday and paring some of its earlier losses following a stronger than expected reading of Germany's Ifo survey.
Coupled with news of rising inflation in Germany, the Ifo reinforced expectations that the European Central Bank would keep rates on hold for some time even as its counterparts elsewhere loosen monetary policy.
The euro was under pressure last week after Germany said it would review its economic growth forecasts if the euro remained strong.
Comments by European Central Bank President Jean-Claude Trichet, who said that volatility in foreign exchange was not good for the global economy further undermined the euro.
At midweek, ECB governing council member Christian Noyer said that overall losses related to the US subprime mortgage problems may total around $250 billion.
His comments had little lasting impact on currencies. He was speaking in Tokyo with Bank of Japan Governor Toshihiko Fukui, who said the BOJ considered the risk of excessive moves in financial markets and their unwinding when it conducted monetary policy.
The euro, however, recovered against the dollar after ing trimming losses as Fed vice-chairman Donald Kohn said that renewed financial market turmoil could slow the US economy more abruptly than thought, signalling a willingness to cut US interest rates further.
The dollar ended the week at its lowest level in more than a week on rum-ours that the European Central Bank is unlikely to increase interest rates anytime soon, and on renewed optimism that further Federal Reserve interest rate cuts would help the world's biggest economy avoid a recession.
Last week's range: $1.4685- $1.4985 (Dh5.3938 - Dh5.5040).
Range for this week: $1.4627- $1.4908 (Dh5.3710 - Dh5.4742).
Yen
The yen began the weekb by appreciating against the dollar on reports that China Investment Corp, the fund set up by China to manage part of its $1.4 trillion in foreign exchange reserves, is expected to invest in Japanese equities.
The yen slumped across the board after news that Citigroup would sell a stake to the Abu Dhabi government as a sign that financial institutions were recovering from a meltdown in the US subprime mortgage market.
The resulting credit crunch gave a boost to the yen, which prompted some investors to take on risky positions that involved selling the low-yielding yen for assets in higher-yielding currencies.
Again the dollar steadied near a one week high against the yen on Thursday as a jump in Wall Street restored investor confid-ence and prompted traders to drop the low-yielding Japanese currency. The dollar continued its rally across the board, ending the week at 111.17 yen.
Last week's range: 106.75 yen - 109.75 yen (Dh0.033466 - Dh0.034407).
Range this week: 107.20 to 111.24 yen (Dh0.032991 to Dh0.034254).
Sterling
At the start of the week the pound found support against both the euro and yen as investors found high-yielding sterling an attractive target for the relatively risky carry trade bets funded by cheap borrowing in low yielders such as the yen.
But with markets pricing in a cut in UK interest rates in coming months and perhaps even as soon as this week, broad sentiment remained sterling negative, with the pound losing ground versus the dollar.
The pound fell by the end of the week versus the dollar and euro after weak housing and mortgage approvals data indicated that the UK housing sector is under pressure, which increases sentiment for a cut in interest rates when the Bank of England meets this week.
Last week's range: $2.0450 - $2.0750 (Dh7.5112 - Dh7.6214).
Range for this week: $2.0532 - $2.0832 (Dh7.5394 - Dh7.6495).
- HSBC Global Markets Middle East
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