dollar in free-fall?

free4440273

Generali wrote: »

FWIW, I got Big Bank's foreign exchange market report for last night. They see lots more dollar weakness to come in the coming months due to the belief that interest rates will have to fall quickly to prop up the US economy in light of the sub prime mortgage debacle and weak economy generally (car sales down, factory orders down). However, the US has inflation towards the upper end of the comfort zone for the Fed and a falling exchange rate will make this worse not better.

This is something I bang on about quite a bit (and anyone with any sense probably ignores me as a nutter). The Fed is looking like it's going to face some tough choices - crucify the indebted (that is the private equity industry, mortgagees and the consumer) and with them the US economy to slay the dragon of inflation or try to keep the party going for a while and let inflation rip.

Any future weakness in the value of the pound and the BoE is likely to face the same choices.

...which is why, contrary to popular belief, i think the Fed will not reduce rates this year. There is an expectation that they will cut but i think inflation worries are still on their mind - the fed doesn't just want to reduce inflation still time; it wants to ensure that it 'sticks' at a low level.

lisyloo

In that case the Deputy Governor of the Bank of England should not have spent this week spinning his reasons for wanting a hike to the media based on London house prices.

I don't agree with the previous post that the BOE doesn't take house prices into account.
The BOE's remit is quite wide.
There is a CPI target but there is also a much wider goal of actin in accordance with Her Majestys goverments economic policy in keeping the UK economy stable (you can find exact wording on the BOE site).

This includes a whole host of issues including house prices.
I wouldn't want to overstate their importance because I think they are one issue of many but they ARE a factor.

If you want to see the inds of things they consider then I would suggest reading the MPC minutes and you can see exactly what they are in bullet point format.

To suggest that it's sole about solely keeping the CPI number right is not right.

The govenor is right to be concerned about house prices as they affect the whole economy but the policy is not based on house prices alone. There are many factors to take into account and sometimes they are opposing.

Eyesparky

I totally agree that their remit is wider than CPI and should be. I personally thing that they need to be paying more attention to currency arbitrage which the UK pound is heavily exposed to. With some of the hedge fund gearing this could make housing price pressure seem like an insignificant issue were it to unwind suddenly. Hopefully such critical systemic issues will be concerning them and will be at the centre of their attention. Fingers crossed!

Generali

Eyesparky wrote: »

I totally agree that their remit is wider than CPI and should be. I personally thing that they need to be paying more attention to currency arbitrage which the UK pound is heavily exposed to. With some of the hedge fund gearing this could make housing price pressure seem like an insignificant issue were it to unwind suddenly. Hopefully such critical systemic issues will be concerning them and will be at the centre of their attention. Fingers crossed!

Realistically, it can't be done though. Remember the ERM? (Or if you're really old, Bretton Woods).

free4440273

This could all mean a surprising .50 percentage point increase (as opposed to the expected .25) in base rates tomorrow - just to support sterling at its current level. however, mervyn would be unlikely to have the support of other members in this regard - would he not?:undecided

free4440273

could a rate rise actually push sterling all the way to 2.0400:eek:

King_Of_Fools

free4440273 wrote: »

could a rate rise actually push sterling all the way to 2.0400:eek:

Unlikely, as the markets have already priced in the rise (unless it is a shock 0.5% rise). If the rates do not rise I would expect to see the pound fall against the dollar.

free4440273

King_Of_Fools wrote: »

Unlikely, as the markets have already priced in the rise (unless it is a shock 0.5% rise). If the rates do not rise I would expect to see the pound fall against the dollar.

yes, i was just thinking ahead (to a potential .50 rate increase, see my previous posts above). also, i think the markets are getting slightly carried away by thinking the Fed is going to cut rates. i just do not see that happening.

Eyesparky

Generali wrote: »

Realistically, it can't be done though. Remember the ERM? (Or if you're really old, Bretton Woods).

Was not in any way talking about fixing currencies ... I was talking about our relatively high interest rates being arbitraged against very low Japanese rates (as a simple example) etc. Fixing exchange rates is a recipe for disaster as you rightly imply. We will likely see repercussions of the Chinese US exchange inflexibility over the next year or so.