| 6/16/2008
2:30 PM: EUR/$..1.5488 $/JPY..108.10 GBP/$..1.9630
$/CHF..1.0440 AUD/$..0.9401 $/CAD..1.0214
USD Supported by Rate
Hike Expectations
The greenback maintained its buoyant tone against
the majors at the start of the week, rallying
to a fresh 3 ½-month high versus the yen
at 108.56 and 1.5348 against the euro. Despite
US Treasury Secretary Hank Paulson continuing
to talk up the dollar at the meeting, there was
no official mention of currencies in the communiqué
from the G8 Finance Ministers meeting. Further,
there was also no discussion of possible coordinated
intervention to prop up the dollar. The primary
issue of concern at the meeting was tackling sharp
rises in global inflation, particularly rapid
increases in the prices for commodities and oil.
Nonetheless, the dollar managed to shrug off the
lack of mention at the meeting and continues to
hold onto its gains.
Economic data released earlier in the session
saw the June NY Fed manufacturing survey contract
by more than anticipated at minus 8.68, versus
expectations for an improvement to minus 2 from
minus 3.23 in May. Meanwhile, the April TICS data
revealed net capital inflows increasing to $60.6
billion, a sharp reversal from net sales of $48.2
billion in the previous month. The NAHB housing
market index fell to 18 in June, down slightly
from a reading of 19 in May.
The coming week will see several key economic
reports from the US including May PPI, Q1 current
account balance, May housing starts, industrial
production, capacity utilization, June Philadelphia
Fed manufacturing survey, and May leading economic
indicators. Inflation is seen creeping higher
with PPI expected to edge up to 0.8% in May from
.2% a month earlier, while the excluding food
and energy PPI is expected to ease to 0.2% from
0.4%. Housing starts are expected to remain weak,
at 980k in May and down from 1.03million units
from April.
Richmond Fed President Lacker chimed in on the
chorus of recent hawkish comments suggesting the
next move will be a hike in interest rates. Lacker
said the balance of risks has evolved from earlier
in the year and the FOMC will need to adjust rates
accordingly. He also said that the dollar impact
on potential inflation is a prominent risk that
the Fed has in mind. Lacker added that while inflation
has been unacceptably high, it has not resulted
in higher expectations. Nonetheless, he said the
Fed must not be complacent on inflation and the
central bank must act forcefully if expectations
erode. In the near-term, the dollar will continue
to be supported by heightened expectations that
the Fed may begin tightening policy as early as
September of this year.
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