Hurricane Rita weighs on USD

While Hurricane Rita has yet to land, its impact is already being felt in capital and currency markets as traders and investors begin to quantify its potential effect on the Gulf coast economy, which remains fragile in the wake of Hurricane Katrina. While Rita is unlikely to wreck the same amount of damage as Katrina, local authorities have adopted a better-safe-than-sorry attitude, and have already moved to shore up local infrastructure and evacuate those in harm’s way, so as to mitigate the impact. Experts are also concerned that Rita will disrupt oil production, which caused the price of oil to spike almost 10% last week. However, if Hurricane Rita passes without incident, the USD should see some strength. The Federal Reserve raised interest rates yesterday, which will drive long term interest rate differentials between the US and other developed countries, indirectly providing support for the USD. The Financial Times reports:

“The message from the FOMC was clear,” said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi: “Increasingly inflationary pressures are a greater concern within the FOMC than the slowdown in economic growth post-Katrina.”

Read More: Rita brings weakness to dollar