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September 14th 2005

Fed to rethink rate hikes

The short term outlook for the USD is becoming more bearish, as investors continue to gauge how the fallout from Hurricane Katrina will impact American monetary policy. A majority of economists now believe the Federal Reserve will hold interest rates constant at its next meeting, for reasons related to the hurricane. First, estimates of the damage wrought by the hurricane now exceed $100 Billion, much of which was fixed capital and business infrastructure. Second, the complete devastation of the Gulf Coast economy means millions of residents are now jobless, which will weigh on growth in the region. Finally, and perhaps most importantly, the impact on refining capacity will ensure fuel prices remain high in the near-term, leaving consumes with less disposable income. In short, the Federal Reserve will likely forestall its planned monetary tightening and wait for the consequences of Hurricane Katrina to fully manifest themselves before acting. ForexNews reports:

The most plausible scenario is for the Fed to leave rates unchanged at 3.50% (60% chance) into the end of the year, and a 40% chance of a rate cut in November or December.

Read More: Katrina to Trigger Fed’s Rethink, Dollar Retreat

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Posted by Adam Kritzer | in Central Banks, US Dollar | 4 Comments »

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4 Comments of “Fed to rethink rate hikes”

  1. skeptic Says:

    A majority of economists now believe the Federal Reserve will hold interest rates constant at its next meeting, for reasons related to the hurricane
    Where do you get this?
    The market is almost 90% sure that the FED is going to tighten in September..
    If you believe what you say ..Boy do I have a trade for you!!!

  2. Euroman Says:

    Oil-pricing: can euro replace weak dollar?
    With oil priced in dollars, the currency’s fall of late has not been fully reflected at the pumps, say some. Cliff Taylor, Economics Editor assesses the case for euro pricing of oil
    The impact of the fall of the US dollar over the past year has been widely analysed, leading, for example, to screams of pain from EU exporters and fears of a disruptive further lurch downward in the value of the greenback.
    However, one impact has gone largely unremarked – a big hit on the profits of oil exporting countries, which have suffered because the commodity is priced in dollars.
    Revenues of OPEC countries are reported to have suffered by as much as 25 per cent, when taking into account the translating of revenues back into their local currencies. And this has raised fresh speculation about the future pricing of oil, in particular whether some exporters might soon consider pricing in another currency – most likely the euro.
    The US dollar has an established position as the world’s most powerful reserve currency. It’s the currency in which the bulk of the world’s commodities are “priced”. Oil prices are always quoted in dollars, whether it’s the cost of US or British crude quoted on the markets or the price targets set by OPEC for its output.
    However the dollar’s fall has re-ignited the debate about whether dollar pricing is appropriate. The issue has surfaced at a number of recent OPEC meetings and Russia has hinted that it is considering switching its pricing policy, though so far it has not given any clear indication that it will do so.
    No immediate move seems likely, although it’s clear from other comments of OPEC officials in recent months that the dollar’s fall has renewed debate on the issue.
    At home, the Irish Road Haulage Association recently wrote to the Tánaiste, Ms Harney, asking the Government to champion a switch to euro oil pricing as part of the Irish presidency. The letter, on behalf of the industry in Ireland and across the EU, claimed such a move would lead to cheaper prices.
    “Oil companies for too long have maintained the higher price of oil has militated against passing on the differential in currency fluctuations to their customers,” the letter claimed. The association clearly believes that most recently the fall in the dollar has not been fully reflected at the pumps.
    Oil companies argue, however, that crude prices have risen, offsetting the currency impact.
    What impact would a change to euro pricing have for the economy? It might not lead to cheaper petrol prices, although there would be a one-off benefit if the hauliers are correct in their claim that the oil companies skim off the benefit from currency moves.
    The main benefit would be stability. It would mean that in future petrol prices would swing purely because of a change in the cost of crude oil prices. At the moment either crude changes or the trend in the dollar can have an impact – a change to euro pricing would reduce two swing factors to one and thus lead to a more stable market.
    However, not all the world uses euros and the US in particular would be most unhappy with such a change. Predictions that it would lead to a dollar collapse with major consequences for the US economy are over the top. And the view of some conspiracy theorists that the Iraq war was triggered by Saddam Hussein’s move to get payment for oil exporters in euros – under the 2000 deal with the UN which allowed some oil back onto the market – is simply bizarre.
    Pricing oil in dollars is very convenient for the US, helping it to underpin the dominance of the currency in international commerce. Dollars have also proved convenient for buyers and sellers, as the dollar market is always liquid and the US currency has worldwide acceptance.
    Is there any chance that the sole reliance on the US currency for oil pricing will change? If it does, the most likely catalyst would be a change in Russia. Keen to forge close ties with the EU, Russia prices some other commodity exports in euro. It also has close trade links with many of the states which are to join the EU next May and, in time, aspire to join the single currency.
    For the moment there doesn’t seem to be a firm momentum behind a move away from the US dollar. However the currency’s decline and the advent of the euro has clearly moved the oil-pricing issue onto the agenda in the medium term.
    The dollar still looks vulnerable, largely due to the huge US current account deficit. A further decline might give fresh impetus to the move.
    If there is to be a move away from dollar pricing, a more diplomatic solution might be to change to pricing using a basket of currencies which would include the dollar, the euro and, most likely, the Chinese yuan, the currency of the coming power in world economic affairs.

  3. aaron armsworthy Says:

    I suspect Greenspan is developing alzheimers what is it the 10th time hes raised rates this year.Raising rates once or twice is a temporary solution to combat inflation but additonal rate hikes only promote and create further inflation.I think we are on a pace to see a pre war world war II german economic crisis such as germany experienced prior to the big war.Did you know during that crisis it was actually cheaper to burn the german marks for heating fuel than it was to buy fuel?I believe this is what will happen to paper currency again.I suggest buy silver and gold and bury it.Bush has no concept of the dollar his daddy gave him every thing he ever wanted he has never had to work for it he thinks you can just print more and more of it and that will fix everything he doesnt realize that that devalues the dollar.Its like Nero burning down Rome.

  4. Euroman Says:

    Indeed, here is man , I am refering to Mr.Armsworthy with lucidity speaking. Not only is the dollar headed the way of the pre war German mark but the entire U.S ecomony based on all consumption-spending with no saving and no production is ready for collapse as well… we may return to a barter economy soon and leave paper currencies to collectors and Forex museum curators.

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