Tag Archive | "Gross Domestic Product"

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ECB Holds Rate, Euro falls


While Washington continues to embarrass the world’s largest economy, the ECB released a dismal projection for the euro zone economy in 2013. The forecast has the ECB considering an interest rate cut to help countries trim their borrowing costs. Bad economic news in Europe spells big trouble for American business, which ships more products to the region than any other area.

In meetings with the ECB’s Governing Council, President Mario Draghi entertained a discussion about not only paring interest rates but also about cutting the deposit rate. In the end, the ECB took no action but Draghi is holding the door open on both possibilities. The historically low lending rate of 0.75 percent remains in effect. This rate has prevailed for the past five months but has not done much to fuel economic growth.

The ECB reported their projections for the euro zone showing that Gross Domestic Product (GDP) would fall between -0.9 and +0.3 percent in 2013. In a region that definitely needs growth, hopes are dim.

Berenberg Bank spokesperson Holger Schmieding told reporters, “The somewhat downbeat ECB forecasts, the somber tone of the ECB statement and Draghi’s admission that the ECB had a ‘wide discussion’ over many issues including a potential rate cut also keep the door open for a cut in early 2013.”

The euro zone and European Union have watchful eyes on the Fiscal Cliff negotiations, or lack thereof. As an importer and exporter, the US negotiations are making analysts work overtime to figure the repercussions of the US debt negotiations. The euro zone is clearly counting on the world’s largest economy to be running at optimum speed in 2013. A failure to do so would not only put the US in recession but would have the same effect on the euro zone and other economies.

One positive outcome of the ECB meeting was that Draghi indicated that the bank would continue to supply euro zone banks with necessary liquidity through the middle of 2013.

Now that the European Union and the IMF have taken action to help Greece, the ECB will be challenged to navigate through a regional recession. Inflation is expected to rise between 1.1 and 2.1 percent in 2013.

Euro zone interest rates vary greatly in the 17 nations. The ECB hopes that its continued reduced rates will stabilize nationals lending rates and reduce them as much as possible. But, like the US where corporations are sitting on more than $2 trillion in capital reserves, euro zone businesses are hoarding their cash. They remain unconvinced that the region’s debt crisis will settle and are prepared for worst case scenarios.

The euro zone’s most puzzling dilemma is Spain. The country is suffering 25 percent unemployment and is in the midst of national outrage and even threats of secession. The ECB has a new debt relief program called the Outright Monetary Transactions (OMT). Under this mechanism, Spain could receive funding assistance.

However, Prime Minister Mariano Rajoy must apply to the euro zone for assistance. Rajoy has asked Draghi to guarantee that borrowing costs would not increase, a commitment Draghi cannot make. Spain would be the first nation to use the OMT.

In the euro zone, the political dialogue has lessened. In the US, Republicans have walked out of Congress and Washington. Talks appear to be stalled and the fiscal cliff is becoming a little too real for Americans.

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The Financial Cliff


The pressure is on in Washington. With President Obama returning to office and signs that some Republicans understand that the party’s ultra-conservative mindset does not resonate with the majority of Americans, it would seem the stage is set for meaningful solutions about the country’s bludgeoning debt. Congress will either follow the Obama lead or the country will fall off the fiscal cliff on December 31. 2012.

Given the erratic record of the Republican House, Americans are edgy about the possibility of a solution to a dilemma that could sink the economy. There is no historical support to think that Congress can coordinate a long-term solution to this pressing problem and place the country’s best interests ahead of their personal own politics.

The House of Representatives will once again attempt to hold Americans hostage, but this time they are negotiating with a President who will not be running for another term and who is committed to represent the middle class, or what is left of it. Analysts have suggested that a temporary debt reduction plan might be implemented but this would be the ultimate kick the can strategy. Americans expect meaningful action.

Three Wings of Fiscal Cliff

The fiscal cliff includes three main components. The temporary payroll tax reduction, the expiration of the Bush Tax cuts and $600 billion in spending cuts are in place to activate on the last day of the year. If negotiations about a remedy are not successful, every American taxpayer will have a heavier burden next year. This will dramatically cut back on consumer spending and severely hurt the Gross Domestic Product (GDP).

The payroll tax reduction has helped many Americans survive the recession and timid recovery. This reduction will most definitely expire.

The $600 billion cuts will cause loss of jobs and send shock waves through the economy. If a debt reduction plan is not in place by December 31, the defense department will suffer the biggest cutbacks.

Bigger Package Needed

As important as avoiding the fiscal cliff is, the country needs a substantial debt reduction plan. The most viable framework for a meaningful debt reduction initiative is the Simpson-Bowles, $4.6 trillion plan. While Simpson-Bowles is an aggressive approach to reduce the deficit, the country needs an even deeper plan.

Americans are exhausted with the dysfunction that has come to symbolize Washington. At a time when the US needs a balanced approach to reduce the debt, the Republican based Grover Norquist Pledge which opposes all legislation with a tax increase, could be the biggest fly in the ointment.

Two other flies in the ointment are Republican Vice Presidential candidate Paul Ryan, whose fiscal approach probably cost Mitt Romney the Presidency and Republican leader of the House, Eric Cantor. Cantor and Ryan have signed the pledge and cannot be relied upon to have any meaningful input in the negotiations. Frankly, the country would be better off if these two thugs were not re-elected.

The only hope to get a substantial deficit reduction plan in place lies with moderate Republicans, a dying breed in Washington. There are signs that the Senate is agreeable to a plan that crosses the aisle. The Congressional Budget Office reports that if a remedy for the fiscal cliff is not resolved, the economy will shrink by 0.5 percent during 2013. More importantly it is very possible that 5 million or more jobs will be lost in 2013, an outcome that apparently is acceptable to Cantor and Ryan. The country will find itself in a deeper recession than the previous recession.

David Cote, CEO of Honeywell explained the intense need for cooperation and action. “If the last debt ceiling discussion was playing with fire, this time they’re playing with nitroglycerin. If they go off the cliff, I think it would spark a recession that’s a lot bigger than economists think. Some think it would just be a small fire. I think it could turn into a conflagration.”

On Wednesday, President Obama met with a number of CEOs. Many of these CEOs are unsympathetic to the gridlock in Congress. Several major corporations have said they are hoarding cash and unwilling to invest in the US in the current political and economic climate. That possibility is another consequence of the fiscal cliff. Some of the country’s biggest corporations will invest in enterprises in other countries.

When the Bush Tax Cuts were introduced as a temporary tax reduction plan. They have been renewed every year since. The President ran on a platform of increasing the tax rate for workers who earn $250,000 or more. Ryan and Cantor are vehemently opposed to this approach despite the fact that many of the country’s wealthiest individuals have said they were amenable to the proposal.

Republicans favor changing the deductions, such as the interest paid on mortgages and other changes to add revenue. At a time when the country desperately needs positive news on the housing crisis, eliminating the deduction for interest would cripple the housing market further.

Just as Republicans did during the election, they continue to step on themselves. MSNBC reported that 60 percent of persons interviewed in exit polls favored tax increases for the nation’s wealthy. It is time for Congress to put their differences aside and negotiate in good faith for a long-term solution.

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Will UK Growth Sink GBPUSD?


Failing to overtake the 1.5700 technical barrier, the GBPUSD has fallen ahead of key economic events scheduled for the next five sessions.  Namely, market participants are targeting the preliminary gross domestic product figures earlier in the week.  This report is just one of about four that is expected, and may be cause for further pound sterling position squaring in the near term.

UK BBA Mortgage Approvals – July 24th 8:30 GMT

British Bankers Association reports are expected to show that mortgage approvals may have improved in the month of June.  Compared to May’s 30,200 approvals, June’s figures are forecasted to be a bit higher at 31,400.  Rosier than one would expect, the figures may be supported by a seemingly resilient labor market that showed an improvement in the country’s unemployment rate for the most recent three month period.  The rate improved to a 9-month low in the second quarter as reported last week.

UK Preliminary Gross Domestic Product – July 25th 8:30 GMT

The Office of National Statistics is anticipated to show that the UK economy gained slightly in the second quarter, improving to a quarterly contraction of 0.2%.  The figure, although still indicative of a shrinking economy, is an improvement over the 0.3% quarter over quarter slide seen in the last reading.  This isn’t that far from reality.  With the country already in the midst of the final stages of production for the 2012 Olympics, the country could have sustained a pickup in activity – buoying a temporary lift in the economic figure.  However, the positive gain is expected to have rather muted effects – with the annualized contractions still at a lackluster 0.3% decline.

CBI Industrial Orders Expectations – July 25th 6:00 GMT

Playing second fiddle to the session’s GDP report, the CBI industrial orders expectations report is likely to only add to any positive momentum built on the market moving report.  Forecasts are for the survey to show improvement in sentiment by the country’s surveyed manufacturers – rising to a reading of -10 versus last month’s actual reading of -11.  Any disappointment, through a lower than anticipated figure, could call the GDP results into question and jeopardize a sterling positive day.

Technical Outlook

Technically speaking, the GBPUSD currency major looks to remain under pressure heading into the highly anticipated GDP report.  Already failing to break through 1.5750 resistance, and confirming a noted rising wedge pattern, the current decline could extend to 1.5530 61.8% fib support.  A downside violation of the fib support would open scope for a 1.5500 test (medium term target).

Source: FXtrek IntelliChart™

Copyright 2001-2012 FXtrek.com, Inc.

 

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Euro Rises On Greece, Yen Remains Under Pressure


FX markets were looking a bit more optimistic to start the week out.  This was especially true for the Euro.  The single currency rose to as high as 1.3281 in the overnight session, following the passage of new Greek austerity measures shortly before the Asian market open.

Under enormous pressure by European leaders, interim Greek Prime Minister Lucas Papademos pushed through new and harsher austerity measures as tens of thousands of Greek citizens took to the streets of Athens to demonstrate.  According to the new measures, pension cuts of up to 300 million euros are set to be instituted along with a 22% cut in the minimum wage rate.  Additional job cuts are expected on budget reduction benchmarks – resulting in over 100,000 new layoffs in the next year.

Although drastic, the measures are expected to help Greece reduce its current deficit ratio of 160% to 120% of GDP in the next 10 years – with the cuts expected to represent about 1.5% of gross domestic product.  The weekend passage sets up the Greek economy for approval of a second bailout in the amount of 130 billion euros – but not before Eurozone finance ministers’ meeting, scheduled for the 15th of February.  Speculators elated over the passing of the bill are now focusing on their concern ahead of the meeting – where policymakers are expected to evaluate the new adjustments.

Nonetheless, the euro remains technically supported above 1.3200, currently.

Going across the continent, the Japanese yen continued to suffer following the release of less than anticipated gross domestic product figures.  For the fourth quarter, the world’s third largest economy shrank by an annualized 2.3%.

The decline was attributed to lower than expected manufacturing and export volume as companies continually struggled to get their operations back on line following the March tsunami disaster.  Companies additionally seemed to be hurt by an appreciated yen – which helped to erode competition of Japanese made goods overseas.  Although low, the actual figure is expected to improve in the medium term with many of the government’s expansive policies still yet to surface in the private and public sectors.  An additional $150 billion in aid was recently approved by the Japanese parliament – which will add to already existing funding expected to improve upon tsunami stricken areas.

For more on the Euro – http://forexalliance.com/2012/02/nikkei-kospi-limited-gains-euro-rise/

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Korean Won Rises Despite Currency War


The Bank of Korea is one of the major participants in the ongoing global currency war, intervening on behalf of the Won to the tune of $1 Billion per day! Meanwhile, the Korean Won has risen 5% in the last month, and 10% over the last three months, the highest in Asia. What a disconnect!

First of all, what’s behind the Korean Won’s rise? In a word, everything. At the moment, things couldn’t be going any better for the Korea Won. The economy is booming. The current account / trade surplus is on pace to surpass forecasts. The Central Bank has hiked its benchmark interest rate once already to 2.25%, and will probably hike again this month. In addition. even though Korean indebtedness is rising, “It is ranked 99th among 129 nations in terms of the ratio of public debt to the gross domestic product (GDP), which means the country’s balance sheet is healthier than most other nations in the world.” Added another analyst, “In this period where there’s a lot of concern about debtor nations, countries that are considered to have higher credit scores will benefit.”

While the Korean stock market has surged (13% this ear and 50% last year), it still remains 25% below its 2007 peak and is trading at valuations well below other Asian countries. It’s no wonder that foreign investors have been net buyers of Korean stocks: “Foreigners have bought more Korean shares than they sold every day for four weeks and net purchases for the year amount to some $13 billion.” It doesn’t hurt investors that the currency is appreciating and that interest rates are rising; at the moment, there really isn’t much downside from investing in Korea.

korea won usd 5 year chart
Meanwhile, the US (Federal Reserve Bank) is contemplating an expansion of its quantitative easing program, and other Central Banks may follow suit. Under the (now fading) paradigm of risk aversion, concerns of economic decline in the industrialized world would have been accompanied by a sell-off in emerging markets and capital flight to safe havens. As evidenced by the spike in the Korean Won and other emerging market currencies, such is no longer the case.

Enter the Bank of Korea (BOK). It is widely known that the South Korean economy is highly dependent on exports, which could be negatively impacted by a rising currency: “For every one percent gain of the won against the U.S. dollar, the nation’s export and gross domestic product decreases by 0.05 percent and 0.07 percent each.” Moreover, South Korea competes directly with Japan, which means the KRW-JPY exchange rate is of crucial importance to the Bank of Korea. Of course, both currencies had been appreciating at a similar clip. Once the Bank of Japan intervened, however, the BOK had no choice bu to double-down on its own efforts.

The Bank of Korea seems to appreciate that there is only so much it can do. Intervention is not cheap, and its foreign exchange reserves have since surged to $290 Billion. It is also not very effective, and the Korean Won has continued to rise. Finally, the currency intervention contradicts the BOK’s efforts to contain rising prices. By not raising interest rates and trying to hold its currency down, it risks stoking inflation. What’s more – South Korea is actually hosting this week’s G20 summit, at which currency intervention is expected to be a major topic of discussion. It would be awkward, to say the least, if Korea’s own currency intervention was broached.

Thus, it seems the Korean Won is destined to keep rising. It, too, is well below its 2007 peak, and there is scope for further appreciation. The BOK will continue to make token attempts at halting its rise, but at this point, the forces that is fighting against – bullish investors and other Central Banks – are too great.

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Swiss Franc Touches Record High, Nears Parity


In the year-to-date, the Swiss Franc has risen 3% against the Dollar, 15% against the Euro, and more than 5% on a trade-weighted basis. It recently touched a record low against the Euro, and is closing in on parity with the USD. Since the beginning of the summer, the Franc has rallied by an unbelievable 15% against the Greenback. I don’t think I’m alone in scratching my head in bewilderment wondering, What could possibly be behind the Franc’s rise?

CHF USD Chart

By this point, everyone is familiar with the safe-haven phenomenon. Basically, concerns of a double-dip recession have ignited a flare-up in risk aversion and spurred investors to shift capital into locales and investment vehicles that are perceived as less risky. Switzerland and by extension the Swiss Franc, have both benefited from this phenomenon: “Anxious investors searching for a haven from fears about the health of Europe’s banks, which knocked equities and sent peripheral eurozone government bond spreads higher, dumped the single currency. The Swiss franc benefited.” Enough said.

At the same time, the Dollar and Japanese Yen are also considered safe-haven currencies, and as you can see from the chart below, the three have hardly traded in lockstep. In other words, there must be something distinguishing the Franc. Economists point to a strong economy: “Gross domestic product rose 0.9 percent from the first quarter, when it increased 1 percent. ‘The underlying economics of Switzerland are very, very healthy. Concerns about deflation have subsided.’ ” The consensus is that the Swiss economy will expand by close to 2% on the year. However, this is hardly impressive, especially compared to other industrialized countries. In addition, Swiss interest rates remain low, which means the opportunity cost of holding the Franc is high. There must be something else going on.

CHF USD EUR JPY 2010
In fact, it looks like the Swiss Franc’s rise is kind of self-fulfilling. For most of 2009, the Swiss National Bank (SNB) spent nearly $200 Billion to artificially hold down the value of the Franc. During this period, the Franc remained stable against the Euro and depreciated against the Dollar and Yen. Having finally broken through the “line in the sand” of €1.50, however, the Franc is now appreciating rapidly. Why? Because the SNB no longer has any credibility. It lost $15 Billion (due to the Euro depreciation) trying to defend the Franc, and in hindsight, the mission was a complete waste of time. As a result, a fresh round of intervention is out of the question. The currency markets have also dismissed the possibility of new intervention, and it seems they are punishing the SNB (via the Franc) for even trying.

According to analysts, the markets have also come to see the Franc as a reincarnation of the Deutschmark, due to its “strong economy, massive foreign reserves, traditional haven status and close links with the German economy.” Those that fear a Eurozone collapse and/or want to make exclusive bets on Germany are now using the Franc as a proxy. I don’t personally understand the logic behind this strategy, but where perception is reality, it’s more important to understand that other investors see the connection rather than seeing the connection for oneself.

Going forward, there is mixed sentiment surrounding the Franc. One analyst warned clients, “I would be cautious about chasing it too far in the short term. There’s still a huge number of headwinds out there.” According to another analyst, “We expect the franc to remain strong throughout the decade.” Personally, I’m inclined to side with the former point of view. From a fundamental standpoint, there isn’t a whole lot to keep the Franc moving up and its recent surge is probably running on fumes. At the very least, I would expect a correction in the near-term.

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CAD: Steady as She Goes


The Canadian Dollar was supposed to be one of the “hot” currencies of 2010. Given that it’s now exactly where it started the year, I think it’s safe to say that this isn’t the case. On the one hand, it would seem that the markets are still confused about how much the CAD should be worth, as Adam recently pointed out. An alternative interpretation is that investors believe the Loonie should trade near parity with the US Dollar; it has hovered just above that mark since breaching it in April.

CAD USD 1 Year
The Canadian Dollar has benefited from strong fundamentals, especially compared to the US. Inflation is low and the economy is stable. “The International Monetary Fund (IMF) recently said that Canada is likely to be the first of the seven major industrialized democracies to return to a budgetary surplus status by 2015.” 2010 GDP growth is projected at 3.3%, compared to around 2.5% in the US.

Canada-GDP-Growth-Rate-Chart-2006-2010

For this reason, “Pacific Investment Management Co. founder Bill Gross said he favors Canada…he’s ‘in awe’ of countries such as Canada that have a low debt-to-gross-domestic- product ratio and solvent financial institutions. ‘North of the border’ has become a ‘preferable destination’ to what he sees in the U.S.” As a result, analysts have started to look beyond commodities, historically seen as the cornerstone of Canada’s economy. When the price of oil collapsed in May, the Loonie hardly budged. Given that Canada’s balance of trade is negative in spite of its commodity exports, maybe in focus is justified.

CAD Versus Oil Prices 2010
The Loonie is also benefiting from a positive interest rate differential with the US. Thanks to two consecutive rate hikes by the Bank of Canada (BOC) – which was the first G7 Central bank to tighten – Canada’s benchmark rate now exceeds the Federal Funds Rate by .5%. If the BOC fulfills expectations and hikes rates again at its meeting on September 8, this differential will widen further. In fact, it could continue expanding well into 2011, since the BOC is well ahead of the Fed in its monetary policy cycle. Here, again, the contrast with the US is self-evident: “The Canadian central bank has been raising interest rates, and has signaled that it will continue to raise interest rates. And with the Fed’s decision today reaffirming its dovish position, the interest rate differential will continue to favor increasingly Canada, and higher interest rates in Canada will continue to favor Canadian dollar strength.”

Bank of Canada 2000-2010 Interest Rate Hike Forecast

Throughout the rest of the summer, the Loonie will likely remain rangebound. Most traders are on vacation and trading volume is low. Besides, risk appetite is currently weak. When the markets return to full swing in September, I expect the Loonie will experience in a surge in volatility. In fact, investors are already starting to adjust their positions, with the most recent Commitment of Traders report showing an increase in Net Longs, bringing the total to $4.2 Billion.

There is certainly a basis for predicting continued strength, but I think much depends on how commodity prices perform. As I pointed out above, the Loonie remains somewhat decoupled from commodities. That it nonetheless got a boost from strong wheat prices and the $40 Billion takeover bid for Potash Corp by mining giant BHP Biliton shows that investors still view Canada as a resource economy. If the global economy avoids a double-dip recession, commodities prices will probably recover and the Loonie will probably rise slowly towards parity. On the flip-side, the Loonie would be one of the big losers of a global slide back into recession.

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US Dollar Paradigm Shift


Since the inception of the financial crisis, the Dollar has been treated as a safe haven currency. Simply, when there was a surge in the level of risk-aversion, the Dollar rose proportionally. When risk aversion gave way to risk appetite, the Dollar fell. It was as simple as that.

Lately, this notion has manifested itself in the EUR/USD exchange rate, with the Euro embodying risk, and the Dollar embodying safety. In fact, a carry trading strategy has unfolded along these lines and made this phenomenon self-fulfilling: traders have taken to reflexively selling the Dollar when news is good and selling the Euro when news is bad.

EUR USD July 2010

In recent weeks, this approach appears to be changing. It started with the US stock market, which began to decline, even as the Dollar was still rising. Investors had started to worry about the housing market stalling, the exhaustion of the government stimulus effect, and worst of all, the possibility of a double-dip recession. The most recent data “showed U.S. gross domestic product in the first quarter grew more slowly than expected…The U.S. GDP numbers came after some weaker-than-expected housing numbers and a dovish Federal Reserve, all of which drove U.S. Treasury yields lower and prompted investors to reassess their dollar positions.”

From my point of view, it is not the possibility of a prolonged recession that is itself noteworthy (though this is surely cause for concern), but rather that the currency markets are paying attention it. To be sure, news of the EU sovereign debt crisis continues to dominate headlines and influence investor psychology. Barring any unforeseen developments, however, this crisis probably won’t evolve much further in the short-term, and it’s logical that investors should turn their attention back to the data.

As a result, “The popular risk-related trade on the euro ‘that was prevalent in the first half of this year appears to have derailed for the time being as market players increasingly focus on comparative fundamentals once again,” summarized one trader. In fact, the Dollar has fallen by 5% over the last month, both against the Euro and on a trade-weighted basis.

DXY 2010

Over the long-term, analysts are divided over which narrative will determine the EUR/USD rate. It would seem that until there is some resolution to the sovereign debt crisis (whether positive or negative), an air of uncertainty will continue to hang over the Euro such that it remains an apt funding currency for a carry trade strategy. US capital markets are the world’s deepest, most liquid, and most stable, and in times of crisis will probably continue to attract risk-averse capital.

On the other side are those who argue that the US will shed its safe-haven status and become a growth currency. According to this line of thinking, the US economy will outperform the EU, Japan, and Britain – its peers/competitors in the Top Tier of currencies.
“The euro zone has been stricken by crisis over the debts of its weaker members. Japan will only emerge slowly from deflation and the U.K. has to deal with its record high budget deficit over the next few years,” argued one analyst.

As a result, “The dollar will return to a pattern seen in the early 1980s and late 1990s, when it appreciated as stocks rose…The likelihood that the dollar performs strongly rather than weakly when investors are risk-seeking will signify a major change in the currency markets.” Under this paradigm, the Japanese Yen and the Swiss Franc would probably become even further entrenched as safe-haven currencies.

Finally, it’s worth pointing out that such a paradigm shift wouldn’t necessarily be good for the Dollar. If the US is indeed able to put the recession behind it, then a renewed focus on growth fundamentals would send the Dollar higher. If the Double-Dip materializes, however, Dollar bulls will probably find themselves hoping that the Dollar can retain its safe haven status.

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No US Rate Hike in 2010


In the midst of the Eurozone debt crisis, forex investors have largely stopped paying attention to interest rate differentials and focused the brunt of their attention on risk. Soon enough, however, there will be a resurgence in the carry trade, at which point interest rates will return to the forefront of investors consciousness.
 
From the standpoint of the carry trade, the US Dollar should be one of the least favorite currencies, since it offers investors a negative real return (without taking exchange rate fluctuations into account). If not for the sudden increase and volatility and consequent ebb in risk appetite, the Dollar would probably still be falling, and would continue to fall well into the future. To understand why, one need look no further than the current Fed Funds Rate (FFR), from which most other short-term rates are (indirectly) derived.
 
The FFR currently stands at 0 -.25%. Moreover, the debt crisis could potentially hamper the US economic recovery and the appreciation in the Dollar is causing inflation to moderate, which has removed almost all of the impetus for the Fed to hike rates anytime soon. There is also the problem of high US unemployment and recent stock market declines. There is currently a tremendous amount of uncertainty, as nobody can say definitively whether the US economy has turned the corner or whether it is headed for double-dip recession.
FED 2010 Rate hike monetary policy
 
Most at the Fed think that the US recovery still remains on track. According to Federal Reserve Bank of Chicago President Charles Evans, “As the recovery progresses and businesses become more confident in the future, employment will increase on a more consistently solid basis. My forecast is that real gross domestic product will grow about 3.5%.” In fact, some of the hawks at the Fed see this as a justification for preemptive rate hikes and/or an unwinding of the Fed’s quantitative easing program. The President of the Kansas City Fed argued recently, “Even if the target was increased to 1 percent, policy would remain very accommodative,” while the Philadelphia Fed President added that the Fed should start selling some of $1 Trillion in Mortgage Backed Securities currently on its balance sheet.
 
Still, such voices represent the minority, and besides, most of the hawks don’t current have any voting power. In other words, it will probably be a while before the Fed actually hike rates. Futures contracts currently reflect an infinitesimally low probability of rate hikes at any of the Fed’s summer meetings. “The February 2011 fed-funds futures contract priced in a 48% chance for the FOMC to lift the funds rate to 0.5% at its Jan. 25-26 meeting.” Meanwhile, an internal Fed analysis has concluded that based on previous rate-setting patterns, it is unlikely that the benchmark FFR will be lifted before 2012.
 
Fed FFR Interest Rate Futures September 2010 Implied Probability
In short, US short-term rates will remain low for the indefinite future. For now, the “safe haven” mentality dictates that investors are less focused on yield and more concerned about capital preservation, which means no one is paying attention to the Fed. When risk appetite picks up, however, the Dollar will probably be dumped very quickly in favor of higher-yielding alternatives.

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US GDP Up But Below Expectations As Recession Continues


The U.S. Commerce Department’s final 4th quarter report indicated the U.S. Gross Domestic Product grew at a 5.6 percent annual rate.  The significant gain was the highest level since the third quarter of 2003, but also below original projections of 5.9 percent growth.

commerce

The total goods and services output in the U.S. rose 2.2 percent in the 3rd quarter.  The report also said that after-tax profits rose 6.5 percent in the fourth quarter 2009, down from a 12.9 percent increase in the third quarter.  During 2009, tax profits declined 6.9 percent, the biggest loss since 2000.

Downward revisions to the business investment, consumer spending and inventories contributed to the revised figures. Richard DeKasker of Woodley Park Research in Washington explained, “This makes inventories leaner, which implies it could create conditions for stronger orders and restocking going forward.  We are already seeing that in the first quarter.  I expect a modest upward revision in the first quarter growth.” It appears that businesses have finally pared their inventories to renewable levels. 

Business inventories decreased by $19.7 billion in the fourth quarter up from $16.9 billion in the third quarter.  The bottom line is that the economy shrunk by 2.4 percent in 2009.  This is the largest decline since 1946. Analysts are projecting GDP growth to settle at about 3.5 percent in 2010. U.S. equity markets did not react to the 2009 revisions.  On Wall Street, the focus remains on housing and unemployment and the Obama Administration announced revisions to its underutilized $17 billion home loan modification program to help stabilize the marketplace.

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