Fed stance pushes dollar to three-year low
By Telis Demos
Published: April 29 2011 19:20 | Last updated: April 29 2011 23:24
The US dollar reached a three-year low while hard assets and equities around the world pushed towards post-crisis highs in the wake of tepid growth figures signalling still-loose monetary policy.
Ben Bernanke, chairman of the US Federal Reserve, gave his first press conference on Wednesday and emphasised that, while the $600bn quantitative easing programme would end as stated in June, the Fed saw enough weakness in the US economy to suggest that price pressures were “transitory”, and it would not begin shrinking the central bank’s enormous balance sheet.
It also propelled commodities, especially precious metals. Gold set another all-time nominal record price of $1,569 an ounce, a rise of 4.1 per cent on the week. Silver neared $50 an ounce.
WTI crude oil added 1.3 per cent this week, touching $114 a barrel, its highest level since September 2008, despite a rise in crude stocks in the US.
The ascent was not slowed by a report on Thursday that the US economy, which was already predicted to slow, was growing more sluggishly than forecast – 1.8 per cent in the first quarter on an annualised basis, versus estimates of 2 per cent.
That is a marked drop-off from the fourth quarter, when annualised GDP growth was 3.1 per cent.
“The Fed’s stance, at least as viewed by the market, provides some cushion for growth to be only good, not great,” said Gregory Peters, global head of fixed-income research at Morgan Stanley.
“Markets may continue to trade higher on this ‘reflation’ theme and downplay fundamentals that could be the catalyst for a near-term correction. But the latest data on growth and inflation suggest rising downside risks later in the second quarter.”
Inflation data in the US and across the EU showed accelerating price growth.
Eurozone prices rose 2.8 per cent in April versus last year, faster than the 2.7 per cent growth in March, it was reported on Friday.
US consumer spending rose 0.6 per cent from February to March, faster than the previous month. But annual growth in core US personal consumption, the Fed’s favoured metric, held steady in March at 0.9 per cent.
Expectations of a widening difference between US and European rates drove a surge in the euro, which rose 1.7 per cent over the week to $1.4882, its highest level since December 2009.
“Interest rate expectations are driving the euro higher, which could threaten the export markets of the member nations,” said Kathleen Brooks, strategist at Forex.com.
“The strength of the euro could be one reason why the [European Central Bank] avoids the term ‘strong vigilance’ at its meeting next Thursday, which typically is used to signal a rate hike at the [following] meeting.”
She predicted that the ECB would signal a slowdown in rate increases.
Equites in core Europe reflected the loose environment. Germany was up 3 per cent, leading a 1.3 per cent rise in the Eurofirst 300 index.
Strong earnings from Caterpillar, Boeing, Volvo and Deutsche Bank also advanced the case for investors to keep buying shares.
The S&P 500 was 1.6 per cent higher for the week. The Nasdaq Composite index added 1.9 per cent and reached a 10-year high.
“Consider that the S&P 500 will earn somewhere around $80 a share in the middle of [an] economic morass – still don’t like stocks?” said Nicholas Colas, chief market strategist at BNY ConvergEx.
Yields on benchmark 10-year German government bonds were little changed, at 3.23 per cent, reflecting uncertainty about future rates. But yields on 10-year Greek debt hit a record 15.07 per cent.
There were also worrying signs in the US Treasury market. Despite the rise in stocks and a falling dollar, yields on 10-year notes fell 10bp to 3.29 per cent.
John Briggs, Treasuries strategist at RBS, said: “Yields will be biased lower over the medium term as the economy faces numerous [and increasing] headwinds and we believe consumers are not in the shape to accept broad-based price increases.”
Growth in Britain was also tepid, just 0.5 per cent in the first quarter, which strategists said would compel the Bank of England, which is meeting next week, to keep rates on hold.
Sterling fell versus the euro on the week to £0.8876.
But elsewhere in currencies, the dollar was “the story of the week, month and year”, said strategists at Brown Brothers Harriman. It fell 1.5 per cent on a trade-weighted basis over the week to its lowest level since July 2008.
The Australian dollar hit a 1982 high and the Swiss franc was at an all-time record. The yen lagged after S&P cut its outlook for Japan’s sovereign debt from “stable” to “negative”.