Once again, the market resembles a drug addict, clinging onto the hope of a further fix now the main dealer is back in town. It’s been a familiar pattern during the five years of the credit crisis, but supplies of the main QE drug are running low.
So, as the Chairman of the US Federal Reserve gets up to speak on Friday, his words will determine whether markets are taken over by hope or despair ahead of the next US monetary policy meeting in September. The implications for currency markets are less clear cut however. We’re now in a world where near zero rates are more the norm, rather than the exception.
Guest post by Forex Broker FxPro
And much of the debate at this weekend’s gathering of the central banking brains will be around the options that central bankers face in the world of zero rates and expanding balance sheets. Even though the Fed has undertaken several initiatives to boost credit and is likely to do more QE, the dollar is still higher this year (vs. basket of major currencies), compared to the 13% decline seen from March to the end of November 2009.
Commentary
Warning shot on oil. We’ve written a fair bit recently about the run-up in oil prices and the impact it’s likely to have on both inflation and the global economy. Now it seems that policy-makers are on the case, with G7 finance ministers last night issuing a statement highlighting their concerns over the latest rise in the oil price. The key question is what can be done about it, especially when some of the increase in prices stems from their own actions (sanctions against Iran) and a fair proportion beyond their control (recent disruptions owing to hurricane Isaac in the US. There’s some speculation that the US may release some strategic reserves and there were calls for oil producing nations to increase supply, but so far there are few signs of this happening.
The dollar’s dilemma. One of the things bothering the US dollar yesterday was the comments from Fitch, noting that a failure in the US to sort out the deficit and debt situation would pose a “significant threat” to the AAA rating. This should be of no surprise, not least given that the US has already been stripped of its AAA status by S&P last year. Since that time (8th August), the dollar is up over 9% on the DXY dollar index. It’s rather simplistic to presume that a downgrade is automatically dollar-negative. After the S&P move, the dollar did trade lower, but only for the first month. In a world where sovereign risk is growing in many places (Fitch is also talking of eurozone risks), then it’s even less valid a reason for selling the dollar. That said, the policy paralysis that will prevail ahead of the election and the much talked about fiscal cliff that looms soon thereafter (expiring fiscal stimulus) creates a challenging environment for the dollar.
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