Weaker USD

illustration: us dollar

(27.07.2011) Signals from yesterday about the American debt ceiling indicate that a solution is not to be expected the coming day. Movements in FX are dominated by depreciation of the dollar against its most frequently traded currencies.

By Anders Grøn Kjelsrud, Analyst at DNB Markets

The saga concerning the American debt ceiling is continuing. Yesterday, the Republican Speaker, John Boehner, suggested a deal where government expenditure would be reduced by USD 3 billion. It was immediately announced that President Obama, whose main priority is a long term agreement, would threaten to veto if the plan would be accepted by the Congress.

According to a recent survey by Pew, the American people prefer a compromise comprising a reduction in public expenditure and increased taxes. Almost 7 of 10 say that the law makers should compromise even if the outcome implies that their initial preferences are unmet.  
Even if the US Treasury’s self proclaimed limit for increasing the debt ceiling will be reached within a week, finance markets seems to be taking the whole process with ease, where a last minute-deal is expected. Yesterday there was an auction of USD 35 billion in 2-year Treasury bills, and reports claim that demand was high. The development of interest rates in the second hand market also points in a direction of confidence in American bonds among investors. However, the burden of insecurity seems to be carried by the dollar, which has depreciated against all major trade currencies the last days, also to the euro. As of this moment, EURUSD is traded about 1.45, whereas it was 1.446 at the same time yesterday.
Quarterly GDP numbers from Great Britain showed a growth of scarcely 0.2 percent from first to second quarter. Despite that this was in line with consensus (Reuters), the market reacted with some enthusiasm, where the pound immediately appreciated.  Further, according to ONS, the office for national statistics in the UK, temporary factors such as the aftermath of the Japanese earthquake and an extra bank holiday related to the Royal wedding, reduced growth by 0.5 percentage points. Nonetheless: Low growth appears to be symptomatic with the problems in Europe, and yesterday’s numbers supports the view that Bank of England will hold the interest rate at the current level in the upcoming time.
From the US, the Conference Board’s consumer confidence index surprisingly rose from 57.6 in June to 59.5 in July. The increase is not consistent with development in other similar measures, or the weak employment growth in recent months. The change could instead probably be attributed to the rebound in equity prices. New figures from the housing market were also issued yesterday. The Case-Shiller price index suggested that prices in the 20 cities included in the main index remain steady from April to May (sa.). Furthermore, the earlier reported decrease in April of 0.1 per cent m/m was revised to an increase of 0.4 per cent. Even thought the price decrease cycle may have come to an end, new home sales were weak in June, falling by 1.0 per cent from the month before.
From India the central bank surprised financial markets yesterday by hiking its key policy rate by 50 basis points, to 8 per cent. The interest rate increase is the eleventh in 18 months, and highlights the central bank’s determination to fight inflation, which is an obvious concern. Depending on preferred measure, Indian consumer price inflation is currently around 7-10 per cent. The aggressive policy stand could also serve as a reminder of the multi-speed global recovery we currently are in: while most advanced economies still struggle with the aftermath of the Great recession, the main challenges in several emerging economies are instead overheating and high inflation.