The dollar strengthened broadly on Monday as investors reconsidered the impact of Hurricane Katrina on the US economy and decided the Federal Reserve will likely go ahead and push interest rates higher this month.
In an unscheduled speech, Dallas Fed President Richard Fisher said he will not rush to judgement on how the devastating storm will affect the economy or how monetary policy should respond.
Analysts interpreted the remarks as supportive of the view that the Fed will lift rates for the 11th consecutive time when it meets on September 20.
"Most people at the Fed seem to feel that the national economy is strong enough to absorb the effects of Katrina," said Lara Rhame, foreign exchange strategist with Credit Suisse First Boston. "That to me seems that you will not see the Fed rate hike derailed."
By late afternoon in the New York session, the euro was down more than 1 percent at $1.2272, and sterling was down by a similar measure at $1.8232.
The dollar was up 1.25 percent against the Swiss franc at 1.2596 francs.
Jens Nordvig, markets economist with Goldman Sachs, said the reason for the dollar's strength could be clearly discerned from how the euro was performing against the dollar.
"The actual expectations for Fed policy are feeding directly into the euro/dollar cross. If you look at the correlation between December fed funds futures and euro/dollar over the last three weeks, it's incredibly tight."
Thus, continued expectations of Fed tightening are directly pushing the euro lower against the dollar.
However, the euro, pound and Swiss franc were holding above pre-Katrina levels.
Some analysts were surprised that the dollar was resilient against the yen after Prime Minister Junichiro Koizumi, a market-friendly reformer, was returned to office with a landslide victory on Sunday. That helped lift the yen and Japanese stocks.
Koizumi's Liberal Democratic Party took 296 seats in the 480-seat lower house of parliament, the first time it has won a majority in the chamber in 15 years.
The dollar gained a half percent to 110.29 yen, while the euro sank a half percent to 135.45 yen.
The decisive win sparked yen purchases on views that it cleared the way for Koizumi to pursue market-friendly reforms, particularly his plan to privatise Japan Post, a financial services giant that includes a savings bank and insurance business with $3 trillion in assets.
The yen also received a boost in Asian trading from revised data showing Japan's economy grew 0.8 percent in the April-June quarter, faster than preliminary figures had suggested.
There were no major releases of US data on Monday, but traders will have a slew of reports to digest in the following days, including trade, retail sales, producer and consumer prices, industrial production, consumer sentiment, Philadelphia Fed and current account data.
The July US trade report is due on Tuesday. Economists are expecting a deficit of $59.8 billion.
"Basically we've had about half of the Katrina move reversed so I think the easy part of that retracement is behind us.
Comments
Comments are closed.