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Dollar Falls After Fed Slashes Fed Funds Rate to Historic Low

Wed, Dec 17 2008, 00:01 GMT
by Hans Nilsson

CMS Forex

Dollar Falls After Fed Slashes Fed Funds Rate to Historic Low

• The dollar fell against its rivals on Tuesday following the Fed interest-rate cut to a historic low, while stocks and bonds rallied. The FOMC decided “to establish a target range for the federal funds rate of 0 to 1/4 percent.” The committee will, in light of a deteriorating economic activity and diminishing inflationary pressures, “support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.”


• The EUR/USD had its largest two-day gain after breaking the downtrend and has gained about 10 cents in four days. The pair is overbought but could remain so for some time. The Fed will print money at an unprecedented rate. “The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity,” according to the accompanying statement. There are resistances in the 1.41 and 1.45 areas and support in the 1.35.

Financial and Economic News and Comments

US & Canada

• The US consumer price index declined a more-than-expected 1.7% m/m in November, the largest drop since records began in 1947, according to data from the Labor Department. The CPI increased 1.1% y/y. Energy prices, which fell 17.0% m/m, accounted for the November CPI decline. Food and beverage prices increased 0.2% m/m in November, up 5.9% y/y. Excluding food and energy, the core CPI was unchanged in November and increased 2.0% y/y. Excluding energy, the CPI was unchanged in November and rose 2.6% y/y. Real average hourly earnings increased 2.5% m/m in November, up 3.1% y/y.

• US housing starts dropped a more-than-expected 18.9% m/m in November to 625,000 units at an annual rate, after falling 6.4% m/m in October to 771,000, Commerce Department data showed. The 18.9% m/m drop was the sharpest since 26.4% in March 1984 and carried housing starts to a record low. Housing starts plunged 47.0% y/y. The drop in November housing starts affected both single-unit starts, which fell 16.9% m/m, and multi-family starts, which dropped 23.3% m/m. Housing starts fell in all major regions of the country.


• US new building permits dropped a more-than-expected 15.6% m/m in November to 616,000 units at an annual rate. Single-family permits fell 12.3% m/m in November, down 46.3% y/y.

• The Federal Reserve cut the federal funds rate to a range of 0 to 0.25% from 1.00%, a record low, virtually bringing the United States to the zero-rate policies that Japan used for six years in its own fight against deflation. In the accompanying statement, the Fed acknowledged that the current US recession is more severe than officials had thought at their last meeting in October. “Labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further,” the statement read. The Fed said it will use “all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” anticipating that “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Regarding inflation, the Fed said “inflationary pressures have diminished appreciably,” expecting “inflation to moderate further in coming quarters.”

Europe

• The eurozone manufacturing PMI declined to 34.5 in December, an all-time low, advance estimates from Markit Economics showed, following November’s 35.6. The services PMI fell to an all-time low of 42.0 from November’s 42.5. With declines in both PMIs, the composite PMI slipped to a record-low 38.3 in December from November’s 38.9.


• Eurozone employment declined 0.1% q/q in Q3, following Q2’s 0.2% q/q increase, Eurostat reported. Employment increased 0.8% y/y in Q3, down from Q2’s upwardly revised 1.3% y/y rise.


• UK consumer-price inflation grew a more-than-expected 4.1% y/y in November, slowing from October's 4.5% y/y rate, according to the Office for National Statistics (ONS). The CPI contracted a less-than-expected 0.1% m/m, following October’s 0.2% m/m decline. Core inflation rose a more-than-forecast 2.0% y/y in November, following October’s 1.9% y/y increase.


• UK retail price inflation increased a less-than-expected 3.0% y/y in November, slowing from October’s 4.2% y/y rise, ONS data showed. The RPI contracted a more-than-expected 0.8% m/m, deepening October’s 0.3% m/m decline.


• European Central Bank President Jean-Claude Trichet sees a limit to interest-rate cut, signaling the ECB may pause in January. “Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes,” Trichet said.

Asia-Pacific

• Japan’s tertiary industry index increased 0.4% m/m in October, following September’s downwardly revised 0.7% m/m decline, the Ministry of Economy, Trade and Industry said. The index fell 1.5% y/y.


• Australia’s dwelling starts dropped 10.7% in Q3, following an upwardly revised 0.2% increase in Q2, the Australian Bureau of Statistics said.


• The Reserve Bank of Australia saw a need for expansionary rates. The rate cut had to be “large enough to have a noticeable effect on financing decisions of lenders and borrowers” and “a reduction of 100 basis points was appropriate and would contribute to supporting confidence among households and businesses,” the RBA said in minutes of its December 2 meeting, released in Sydney today. “A reduction of this size would move monetary policy quickly to an expansionary setting. Given trends in money market yields, the Board expected that most lending rates would fall significantly,” the RBA said.

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Published on  Wed, Dec 17 2008, 00:11 GMT