Sadly I missed this last week, but for your reading pleasure...
http://www.thebusinessonline.com/Sto...9EE1C52&page=1
Three cheers for sterling, but why is the dollar so sluggish?
13 August 2006
Sir – After raising rates at each of its previous seventeen meetings, the Federal Open Markets Committee voted last week to leave the rate unchanged. The decision to hold rates came as little surprise to us, although we feel there is a chance that the monetary reins will be tightened once more by the end of the year.
Chairman Ben Bernanke appears to be basing his view on the Fed’s forecast of slowing economic growth in the US. If the forecast is correct, inflation will grind lower, as will bond yields. However, the nerve of bond investors will be tested if evidence emerges of far faster growth or if the inflation picture deteriorates significantly.
What is interesting to us is the lack of response from the dollar, which is surprising given the Fed’s soft growth outlook and the fact that, in the context of the large current account deficit, the dollar needs to be a high yielding currency in order to maintain its value. We suspect the greenback is being underpinned by instability in the Middle East and the high price of oil – which is paid for in dollars.
In managing fixed income investments, it will be important to anticipate correctly those data points which presage a deceleration in the US economy. This implies that the tool of duration management could be more important than it has been for some time.
The release of the Bank of England’s quarterly inflation report did not dampen concerns that further monetary tightening is on its way. While Bank of England governor Mervyn King allayed fears that CPI would move significantly above the Bank’s 2% target, he emphasised that there was a sufficient degree of uncertainty in current forecasts (global economic growth, oil price) to make a further hike this year a possibility.
However, the market appears not to have interpreted the report as the precursor to a series of rate rises. Bond values have recovered much of the ground lost in the aftermath of last Thursday’s hike, while long gilt prices are now actually considerably higher than before that announcement.
John Whittaker, MEP
UK Independence Party
(North West region)
European Parliament, Brussels