Stronger euro

(29.03.2011) Monetary policy signals from European and US central bankers contribute to strengthening the euro and weaken the dollar.

By Kjersti Haugland, Analyst at DNB Markets

illustration euro cc DNB marketsStock markets in the US and in Asia have fallen back since yesterday morning. The Japanese Nikkei index is weighed by news about plutonium found in the soil at the nuclear power plants. Prime minister Naoto Kan's popularity is free falling, and he was attacked in parliament on Tuesday for his poor management of the catastrophe.

The Swiss Franc and the NOK have been the biggest gainers since yesterday's report, and the euro has strengthened against the dollar and the pound sterling. Investors took a break from worries about European debt yesterday and instead devoted their attention to monetary policy. Governor Trichet was the next ECB member in line to deliver clear signals that the April hike will be executed as planned. According to Trichet the inflation in the euro zone is "durably" above ECB's target.

Across the Atlantic: The image of a more aggressive FOMC (after statements from committee members Plosser on Friday and Bullard on Monday) was nuanced when three other members, Charles Evans, Dennis Lockhart and Eric Rosengren (the former is the only one with the right to vote) in turn stated a more dovish view on the matter yesterday. They all see a need for maintaining the expansive stance of monetary policy. The surge in gas and food prices is seen as temporary and the risk of a feed-through to core inflation as fairly limited. Even though many key indicators have been encouraging lately, the members point out that the falling unemployment rate is much due to Americans pulling out of the labour force, which is hardly a sign of strength in the US economy. The QE2 programme will be finished in June, and next meeting in end-April is the only opportunity to stop the purchases at an earlier stage than planned. This does not seem, according to Evans, very likely. We agree, and do not expect hikes until next year.

US consumers contribute to 70 per cent of total demand in the US economy. Hence, they are of crucial importance to ignite and maintain the upturn. A lacklustre labour market and a depressed housing market have made this a very challenging task. However: Towards the end of last year, private consumption did pick up markedly. Going into 2011, Obamas' administration provided extended tax relief and labour market support to keep stimulating the US consumer. Unfortunately, surging food and electricity prices, and most importantly the surging oil prices in the wake of political turmoil in North Africa and the Middle East, has reduced the consumers' purchasing power. Households' nominal income increased by 0.3% m/m in February, but the high headline inflation led to a fall in real income (-0.1% m/m), the first since September. Real private spending still came to solid 0.3% m/m, implying that saving has been reduced to finance consumption growth. The savings rate fell from 6.1% in January to 5.8% in February. March CB consumer confidence is released today, and is expected to show a fall, due to the jump in gas prices.

The SEK did not strengthen like the NOK yesterday, and the reason might have been disappointing retail sales. Sales were flat in February, after a 0.2% m/m rise the previous month. Despite strong contributions from household consumption in national accounts: retail sales have disappointed consistently through the last months, even displaying monthly declines. As in Norway, high electricity prices combined with high electricity consumption, due to very cold weather, has contributed to reducing demand for other goods. Also, one should keep in mind that the unemployment level in Sweden is high, even though the labour market has been improving rapidly. The interest rate level is still low, but increasing. The key policy rate has been hiked at each meeting since July 2010, and will continue to be so for a while, according to the Riksbank. These factors might contribute to explain why consumer confidence has moderated somewhat the last few months, house price growth has been more contained and credit growth has come down.