US dollar mixed after Thai coup; Fed meeting in focus Wednesday, September 20, 2006
NEW YORK- The dollar traded mixed Tuesday as news of a coup in Thailand prompted investors to turn away from risky assets, and traders looking ahead to a Federal Reserve announcement on US monetary policy.
At 2100 GMT, the euro fell to 1.2675 usd from 1.2705 usd late Monday in New York.
The dollar stood at 117.71 yen, compared with 117.91 yen late on Monday.
Reports from Thailand said a state of emergency had been declared after an apparent military coup, with plotters said to have taken control of all six of the kingdom's public television stations, as well as radio stations.
The news sparked selling in the Thai baht and quickly spread to other Asian and Latin American currencies as the news caused investors to curb their risk appetite, with the Australian dollar also falling to a day low of 0.7515 against its US counterpart.
"It's been a long time since the word contagion has been in use but the events in Thailand could prove to be just that if players decide to take risk off the table by taking money off on their other emerging market trades," said Divyang Shah at IDEAglobal.com.
The US dollar benefited from the news meanwhile, erasing some of its earlier losses which came in the wake of weaker-than-expected US housing starts and inflation data which further reduced the chances of the Federal Reserve raising interest rates any further.
Jamie Coleman at Thomson IFR Markets said the trouble in Thailand was likely to spark jitters in financial markets, particularly as the Thai devaluation of July 1997 was the catalyst for the Asian financial crisis.
The initial dollar reaction during that crisis was a period of dollar strength, he noted, followed by a weakening as Asian nations repatriated foreign holdings.
"This present crisis looks contained, but few felt a devaluation by a small country would have such profound impact around the world for more than a year in its wake," he cautioned.
The yen made a sharp recovery after Monday's selloff, which came after the Group of Seven made no specific reference to the Japanese currency.
Ian Gunner at Mellon Financial said the yen saw "a dramatic turn of fortune" after comments by Japanese Finance Minister Sadakazu Tanigaki who dismissed the notion of a secret deal between Japan and the euro zone on exchange rates.
In the United States, the Federal Reserve was widely expected to keep its key interest rate unchanged at 5.25 pct at its meeting on Wednesday, but market will be looking for clues on future moves by the central bank.
A report Tuesday showed US wholesale prices edged up 0.1 pct in August, in a further sign of easing inflation pressures.
Peter Morici, an economist at the University of Maryland School of Business, said inflation may be even less of a problem as a result of the decline in energy costs in recent weeks.
"Since early August, crude oil prices have fallen nearly 15 usd a barrel and gasoline has dropped more than 50 cents a gallon," he noted.
"Inflation should cool significantly in September and October, and the Fed should become more comfortable, keeping interest rates at current levels."
In late New York trade, the dollar stood at 1.2512 sfr after 1.2505 Monday. The pound was being traded at 1.8813 usd from 1.8802.
At 2100 GMT, the euro fell to 1.2675 usd from 1.2705 usd late Monday in New York.
The dollar stood at 117.71 yen, compared with 117.91 yen late on Monday.
Reports from Thailand said a state of emergency had been declared after an apparent military coup, with plotters said to have taken control of all six of the kingdom's public television stations, as well as radio stations.
The news sparked selling in the Thai baht and quickly spread to other Asian and Latin American currencies as the news caused investors to curb their risk appetite, with the Australian dollar also falling to a day low of 0.7515 against its US counterpart.
"It's been a long time since the word contagion has been in use but the events in Thailand could prove to be just that if players decide to take risk off the table by taking money off on their other emerging market trades," said Divyang Shah at IDEAglobal.com.
The US dollar benefited from the news meanwhile, erasing some of its earlier losses which came in the wake of weaker-than-expected US housing starts and inflation data which further reduced the chances of the Federal Reserve raising interest rates any further.
Jamie Coleman at Thomson IFR Markets said the trouble in Thailand was likely to spark jitters in financial markets, particularly as the Thai devaluation of July 1997 was the catalyst for the Asian financial crisis.
The initial dollar reaction during that crisis was a period of dollar strength, he noted, followed by a weakening as Asian nations repatriated foreign holdings.
"This present crisis looks contained, but few felt a devaluation by a small country would have such profound impact around the world for more than a year in its wake," he cautioned.
The yen made a sharp recovery after Monday's selloff, which came after the Group of Seven made no specific reference to the Japanese currency.
Ian Gunner at Mellon Financial said the yen saw "a dramatic turn of fortune" after comments by Japanese Finance Minister Sadakazu Tanigaki who dismissed the notion of a secret deal between Japan and the euro zone on exchange rates.
In the United States, the Federal Reserve was widely expected to keep its key interest rate unchanged at 5.25 pct at its meeting on Wednesday, but market will be looking for clues on future moves by the central bank.
A report Tuesday showed US wholesale prices edged up 0.1 pct in August, in a further sign of easing inflation pressures.
Peter Morici, an economist at the University of Maryland School of Business, said inflation may be even less of a problem as a result of the decline in energy costs in recent weeks.
"Since early August, crude oil prices have fallen nearly 15 usd a barrel and gasoline has dropped more than 50 cents a gallon," he noted.
"Inflation should cool significantly in September and October, and the Fed should become more comfortable, keeping interest rates at current levels."
In late New York trade, the dollar stood at 1.2512 sfr after 1.2505 Monday. The pound was being traded at 1.8813 usd from 1.8802.
Labels: Forex News, US Dollar
Bonds rally ahead of Fed meeting
NEW YORK- Treasury bond prices mounted a strong rally Tuesday ahead of a key Federal Reserve meeting, as investors were cheered on by economic data that solidified the case for the Fed to hold interest rates steady.
At 5 p.m. EDT, the 10-year Treasury note was up 19/32 from late Monday. Its yield, which moves in the opposite direction, fell to 4.73 percent from 4.81 percent.
The 30-year bond was up 1 1/32. Its yield fell to 4.85 percent from 4.93 percent.
The 2-year note was up 4/32, yielding 4.80 percent, down from 4.88 percent.
Yields on 3-month Treasury bills were 4.95 percent as the discount rate fell to 4.82 percent from 4.83 percent.
Prices rose most sharply in the wake of government data that showed wholesale prices last month rose by a smaller-than-expected amount. Also aiding the Treasury bond market were housing data showing a continued slowing in the sector.
"Today's numbers won't be missed by the Fed," said Kevin Giddis, managing director in fixed income for investment fund Morgan Keegan & Co. in Memphis. "This type of data should make it easier for them on one hand, and possibly disturb them on another," he said. While inflation numbers are moving the way the central bankers would like them to, the housing sector may be slowing down more than the Fed would like to see, Giddis said.
The Labor Department said its producer price index rose by 0.1 percent overall for August, less than the expected rise of 0.2 percent. The core PPI, which strips out food and energy, fell by 0.4 percent even though it was expected to rise by 0.2 percent.
The PPI data follow on the heels of Friday's consumer price index, which was also tame. Collectively, the data suggest that the inflation threat faced by the economy is fading, which helps bolster the case for the Fed holding monetary policy steady.
That is a significant development, coming just ahead of Wednesday's gathering of the interest-rate setting Federal Open Market Committee. Wall Street universally expects the Fed to keep the federal-funds target rate at 5.25 percent for the second straight meeting after two years of raising rates. Central bankers generally believe a cooling economy will moderate inflation pressures most officials still call too high.
Housing data from the Commerce Department helped reinforce the market's view on the economy and rate policy. August housing starts marked their fifth straight decline in six months and slipped by 6 percent to a 1.665 million unit annual rate, the lowest level in three years. Housing numbers have broadly been cooling, and that is also aiding the Fed's case.
Labels: Market News
Economists: cheaper oil not a panacea
WASHINGTON - It should only be this simple: Oil prices plunge 20 percent, leading businesses and consumers to ramp up their spending, which gives a nice jolt to the economy.
That seems to be the conventional wisdom on Wall Street right now, where the pullback in energy prices is being cheered by investors.
But some contrarians think that view could be missing the point. While the decline in prices will provide some relief to motorists, it also reflects the country's weakening economic outlook. In other words, any benefit from falling pump prices may be outweighed by higher interest rates and a stagnating real-estate market.
Moreover, the economy did not crater in the face of soaring fuel prices -- because energy costs are only a small portion of the average U.S. household budget -- so why should the reverse be true?
"Lower oil prices don't mean that the economy is going to improve," said David Resler, chief economist at Nomura Securities in New York.
Crude oil futures fell sharply to around $62 a barrel Tuesday as traders focused on rising global inventories, easing supply threats and weakening demand. The interplay between energy and the economy, in the context of a real-estate slowdown, is likely to be a key issue at Wednesday's Federal Reserve meeting. The agency left interest rates unchanged in August amid signs of slower economic growth, and many economists expect the central bank to again hold its short-term rate steady at 5.25 percent.
To be sure, the nickels and dimes Americans save on fuel add up -- the country is spending roughly $70 million a day less on gasoline today than a year ago, according to the Oil Price Information Service. This may make consumers feel a little wealthier, and they could very well spend the extra pocket change on other things.
"But it's not going to stimulate spending that wouldn't have been there," said Resler. "It's just going to reallocate the spending" -- from, say, Exxon Mobil Corp. to Wal-Mart Stores Inc.
That somewhat pessimistic view is even a little too sunny for Peter Schiff, president of Euro Pacific Capital, Inc. of Darien, Conn.
Schiff said the economy has grown in recent years despite soaring gasoline prices thanks to historically low interest rates that made credit-card debt look cheap while fueling a housing boom that prompted many homeowners to take out home-equity loans.
According to the Federal Reserve, U.S. consumers owed $841 billion in credit-card and other revolving debts in July, compared with $804 billion a year earlier. Non-revolving debt, which includes automobile and personal loans, totaled $1.51 trillion in July, compared with $1.46 trillion a year earlier.
But as adjustable rates on mortgages and credit cards rise, "all of a sudden, $2.50-a-gallon might feel more expensive than $3," Schiff said.
Instead of spending all of their savings at the pump on other goods and services, Schiff expects many consumers to buckle down by either paying down debts or putting more money in the bank.
Indeed, the nation's retailers have a somewhat similar outlook. The National Retail Federation said Tuesday it expects retail sales in November and December to rise by 5 percent -- below last year's 6 percent increase.
That assessment is backed up by signs from the trucking industry that its peak pre-holiday shipping season will be a disappointment even after the benefits of cheaper diesel prices are factored in.
"The negative freight trends significantly outweigh the benefits of declining fuel prices," Merrill Lynch trucking analyst Ken Hoexter said in a research note.
And as if any further confirmation of the housing market's woe was necessary, the Commerce Department reported Tuesday that construction of new homes dropped a bigger-than-expected 6 percent in August -- the fifth decline in six months.
Still, Global Insight chief economist Nariman Behravesh sees reason for optimism.
He acknowledged that the anemic housing market is like a dark cloud hanging over the economy, but said it is all the more reason why the drop in oil prices should be seen as a ray of light.
"It helps to cushion the blow, in terms of the impact on the consumer," Behravesh said.
With oil at $65 instead of $75, Behravesh sees U.S. gross domestic product getting one- to two-tenths of a percentage point bump over the next year. A chunk of money that had flowed to foreign oil-producing nations will now go to American companies, he said.
Indeed, Wall Street already seems to have factored in a likely economic boon. Since July 14, when oil prices peaked above $78 a barrel, the S&P 500 Index has climbed by almost 7 percent. (Of course, part of the stock market surge is tied to expectations that the Federal Reserve is done raising rates for the time being.)
Merrill Lynch economist Sheryl King said investors may not be putting the recent drop in oil prices in the proper perspective.
Over the past 52 weeks, retail gasoline prices have averaged $2.62 a gallon, or 12 cents more than the current nationwide average of $2.50, according to Energy Department data. So it doesn't make much sense to get giddy about the post-summer slump, King said.
"The $3 gas price wasn't there for very long," King said.
Or as Schiff put it: "We're talking about $60 instead of $70. We're not talking about $20."
Labels: Market News
