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FX Crossroads

USD, recessions, and Fed easing cycles

Wed, Jan 23 2008, 13:24 GMT
by Danske Research Team

Danske Bank A/S

Summary and conclusions

• • The past few days have seen much action on the financial markets. First, we had a significant sell-off in the equity markets, which sent JPY and CHF higher, and EUR/USD lower. Then, there was an inter-meeting response from the Fed – cutting rates by 75bp. This brought some relief to the market and Monday’s movements in the FX market were reversed.
  
• • In this edition of FX Crossroads we take a look at how USD has performed in periods following the initiation of an easing cycle by the Fed, and following the beginning of a US recession.
  
• • We find that the current easing cycle so far resembles the 1989 cycle most in terms of the dollar’s performance. That period was the only cycle where the dollar was weaker a full calendar year after the first rate cut. This historical evidence is consistent with our call for further dollar weakness in the coming months, but also with our expectation of a reversal to the dollar downtrend from around mid-2008.
  
• • In Australia, Q4 inflation numbers were released last night and surprised on the upside, posting an increase in underlying inflation of 3.6% y/y. This is well above the Reserve Bank of Australia’s official target zone and we renew our call for a 25bp hike at the 5 February meeting.
  
• • FX Crossroads is published every second Wednesday. The next publication date is 6 February 2008

• Download the full report

Published on  Wed, Jan 23 2008, 13:26 GMT

Archive

• EUR: Where's my 75bn?
  Published On Wed, Aug 6 2008, 12:43 GMT
• Why the kiwi cannot fly, and at what level NOK/SEK will break the range
  Published On Wed, Jul 23 2008, 15:09 GMT
• GBP set to weaken further over summer
  Published On Thu, Jul 10 2008, 09:45 GMT
• Special edition: Focus on inflation and FX
  Published On Wed, Jun 25 2008, 15:09 GMT
• G10: FX implications of rising food and energy prices
  Published On Wed, May 28 2008, 15:24 GMT

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