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Sun 17 Oct 2021 07:31GMT

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Dollar Suffers after IMF Warning

Sterling found some support yesterday, drawing from expectations that the Bank of England could raise interest rates by mid-year and underpinned by broader dollar weakness.

The pound found support after minutes of the BoE January meeting on Wednesday showed that policymaker Martin Weale joined Andrew Sentance in voting for a 25 basis point rate rise from record low 0.5%

Market analysts have commented that the additional vote to raise rates prompted investors to price in the rising likelihood of an increase in coming months.

Wishful thinking others thought, with the weakness highlighted this week indicated that the UK’s dance with a double dip recession would cap the pound’s gains.

In a Reuters report, Chris Walker currency strategist at UBS said: “The market is literally reading the minutes as hawkish, and not reading in the context of the weak GDP print.

But referring to a speech by BoE Governor Mervyn King on Tuesday Walker added: “King’s speech after the GDP print and the GDP itself suggest that the analysis of the minutes should be put into context a bit”.

The pound is at risk of being dragged lower by the threat of stagflation now being a concern. With analysts worried that stubbornly high price pressures at a time when the economy struggled to recover being a recipe of (currency) disaster.

The pound managed to claw back some of its week of declines after the dollar extended losses after US data showed a rise in the number of Americans making first-time claims for jobless benefits, suggesting continues strains in the labour market.

The US Dollar has taken notice of Japan’s problems this week (see below) and reacted yesterday to a warning from Moody’s that reminded the greenback that investors might turn negative on its US rating outlook in the next two years, given how the country’s budget deficit has continued to swell.

The US fiscal concerns may drag down the dollar after the knee jerk reaction to Japan’s downgrade fades.

As a result of the speculation the dollar weakened to a near 11 week low against a basket of currencies.

Focus for the dollar will be today’s GDP data due at 13.30, which is forecast to have grown an annualised 3.5% last quarter, up from 2.6% the previous quarter.

A strong figure should benefit the dollar, but the shock UK GDP data earlier this week will still be leaving a bitter taste in the mouths of many market watchers, so nothing is guaranteed.
The Euro benefitted yesterday by German consumer prices rising at their fastest pace since October 2008 this month data realised yesterday afternoon showed. This has offered early signs that inflation may now be high enough to be of concern to the European Central Bank, opening the door to a potential increase of interest rates?

Apart from further rises in the costs of heating oil and fuels as well as fruits and vegetables, Germany’s Federal Statistics Office commented that January’s increase was also due to a national hike in electricity bills to subsidise renewable energy producers.

The chance of one and possible two ECB interest rate hikes within months has been strengthened with this news according to a Reuters poll.

Standard & Poor’s rating agency cut Japan’s long-term sovereign debt rating for the first time since 2002.

This was followed by the United States and Japan being offered a stark warning by the IMF stating that they need to spell out plans for cutting their budget deficits before financial markets turn on them and force borrowing costs higher.

In a report of global debt and deficits, the IMF expressed concern that budget cutting in advanced economies with large debts was set to slow, and it pointed at Japan and US as the economies that are falling behind.

Overnight Japan’s Prime Minister Naoto Kan vowed to push ahead with tax reforms aimed at curbing country’s debt, but an uncooperative opposition and divisions within his own party on policy make the chances of success slim.

The USA’s outstanding public debt has swelled more than 60% of total output since the financial crisis gripped the markets, and with a record $1.5 trillion budget deficit expected this year, is set to grow further.

Japan’s woes are even deeper. Its debt has been steadily growing for years as it tried to revive the economy from a huge asset bubble burst in the 90s and outstanding longer-term government debt now stands around 18% of GDP.

Kan has made tax and social security reform, including a future rise in the 5% sales tax, a priority given the rising costs of Japan’s fast-aging society and a public debt that the biggest among advanced nations.