US Dollar Resurgence
Market Highlights
UK Interest Rate left at 5%
Last Thursday the Bank of England announced that UK interest rates would remain on hold at 5% and decided to focus on inflation risks, despite signs that the economy is slowing.
The rate freeze had been predicted by many and the general consensus is that there will be a 25 basis point cut in June to 4.75%.
The decision came despite a flurry of subdued data which added to worries about the state of the UK economy.
However, rising fuel and food prices means that inflation is ahead of the government's target of 2%.
Also in the past week there was some negative data within the manufacturing sector which saw output fall by 0.5% in March, the sharpest rate of decline in six months. Consumer confidence also fell to its weakest level in almost four years in April as the global credit crunch coupled with the ongoing rise in energy and food costs raised concerns about the economic outlook, which halted sterling’s recent modest gains against the euro and dollar.
ECB Interest Rate on hold as Inflation remains the key focal point
A hawkish ECB policy meeting on Thursday provided a lift for the euro versus the dollar and sterling after Interest Rates were held at 4%. Jean Claude Trichet the European Central Bank chief showed no real softening in his tone at the conference in Athens. There was some talk that the recent run of surprisingly weak eurozone data, which showed weak German manufacturing orders and eurozone retails sales, would have resulted in a change of attitude. However, inflation remains the main focal point and economists see little prospect of early rate cuts. Following the policy meeting Trichet stressed that the ECB’s primary goal is price stability and he is strongly committed to preventing second round effects materialising from current elevated inflation readings, following the upwards spike in the HICP (Harmonised Index of Consumer Prices) rate to well over 3% in recent months.
Supply worries send oil to record $126 a barrel
World Central Banks welcomed the recent strength of the US dollar. The US and Europe now have a united desire to see the dollar strengthen against the euro, which at one point on Wednesday rallied to a six-week high. They are concerned that the currency markets have been paying too much attention to short term economic weakness and market stress in the US, and not enough to the medium term prospects for the US and Europe. Senior eurozone officials believe that the euro-dollar rate had reached levels unhelpful to both the US and European economies. But both sides believe fundamentals and central bank policies are turning in the direction of relative dollar strength.
Crude oil hit yet another all-time high at the end of last weeks trading, this was
driven by surging demand and continuing supply concerns, US light crude touched $124.70 a barrel. Soaring global demand for oil is being led by China's continuing economic boom and, to a lesser extent, by India's rapid economic expansion. Both are now increasingly competing with the US, the European Union and Japan for the share of global oil production. Economists warn that ongoing high oil prices will have an impact on the global economy, hitting growth, and fuelling inflation.
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