Watch for 'sneak attack' on rates, economist warns

[discocrisco01]

Source: Financial Post
OTTAWA -- The U.S. dollar continued to get thumped on foreign exchange markets yesterday, weakening past the US$1.50 per euro mark for the first time in 14 months, as investors bet the global economic recovery is leaving the United States behind.

The euro and British sterling roared ahead in early trade as finance officials in Britain and China indicated those countries may soon begin taking initial steps to unwind the massive amounts of stimulus injected to keep their economies afloat during the financial crisis.

The pound hit a five-week high against the U.S. currency of US$1.6636. For its part, the Canadian dollar surged as much as US1¢, erasing half its decline on Tuesday, before a late day greenback rally capped its gains to US0.43¢. It closed at US95.60¢.

The U.S. dollar is expected to remain under pressure, analysts say, should the Fed continue to trail other central banks in tightening access to money and Congress fails to address the country’s massive annual deficits.

At least one Bay Street analyst said that despite the Bank of Canada’s dovish rhetoric this week, markets should be on watch for a “sneak attack” by the central bank to raise rates sooner than expected, just like the Reserve Bank of Australia did earlier this month.

Sheryl King, chief economist at Merrill Lynch Canada, said this might occur after the central bank discovers the economy is in danger of overheating in the first half of 2010 as a result of its pledge to keep rates at a historic low of 0.25% until June 2010. The Bank of Canada, which releases its update economic outlook today, said the Canadian dollar’s strength has slowed growth and could “more than fully offset” gain recorded to date.

Statements from London and Beijing caught the attention of traders yesterday.

The Bank of England’s governor, Mervyn King, wrote an opinion piece for Scotland’s The Herald in which he told Britons that interest rates “will return to more normal levels” and they should begin taking that into account when planning future acquisitions.

Further, minutes from a recent meeting of the Bank of England’s monetary policy committee indicated there was unanimous agreement to leave the size of its asset-purchase program as is – which marks a slight shift as there was debate in previous months about boosting the scheme. The program aims to inject liquidity into financial markets to ensure banks lend to firms and households.

Read more at http://www.canada.com/business/fp/Beware+sneak+attack+rates+economist/2128184/story.html?id=2128184

[Dreamer Tatum]

1. If we are truly in recovery mode, then we might have to bump interest rates

that, or quit borrowing so much damned money. Something will have to sop up the ocean of greenbacks out there.

[imdjh]

2. Seems to me that the dollar is about where it was 15 years ago, but gas was only $1/gal then. Why?

[aint_no_life_nowhere]

3. The dollar is really taking a beating

For those like me who have been saving money instead of investing it in the stock market, I guess there's just no way to win. The value of my life's savings seems to diminish on a daily basis. I thought it was supposed to be the responsible thing to do to try to save instead of get into debt. But then the Federal Reserve has been setting interest rates at almost zero which would seem to encourage borrowing and spending more than saving money.