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Dollar May Weaken on Speculation Fed Won't Raise Rates Tomorrow

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  • Dollar May Weaken on Speculation Fed Won't Raise Rates Tomorrow

    Dollar May Weaken on Speculation Fed Won't Raise Rates Tomorrow
    August 7, 2006 (Bloomberg)

    The dollar may weaken on speculation the Federal Reserve tomorrow will halt a two-year campaign of increasing borrowing costs as the U.S. economy shows more evidence of slowing growth.

    The currency may fall for a third day against the euro and a second versus the yen on speculation the Fed will hold its overnight lending rate between banks at 5.25 percent. The dollar dropped to a two-month low against the euro and a three- week low versus the yen on Aug. 4 after a report showed the U.S. economy added fewer jobs than expected.

    ``The Fed will be unable to raise rates tomorrow amid signs of a slowing economy,'' said Masaki Fukui, an economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second largest lender by assets. ``The dollar- bearish trend is likely to accelerate as the Fed already may be done.''

    AntiSpin: This certainly appears to be the consensus view. The Fed wants to keep raising rates, as the Bank of England has, due to inflation pressures, but there are clear signs of a slowing economy in the US, especially employment. As home prices are highly correlated to employment, raising rates further could result in a rapid deceleration in housing prices, causing further reductions in housing related employment. Housing is the one segment of the economy most closely linked to consumption, which represents 70% of economic activity in the US. Also, housing is responsible for -- depending on which report you read -- for between $26% and 43% of all private sector employment growth since 2001. Declines in housing related employment and declines in home prices will likely be self-reinforcing. Meanwhile, energy prices remain stubbornly high and are working their way into the core inflation rate.

    The Fed is really in a bind, here. The ShadowFed is still debating what to do, and what the Fed will do. Stay tuned for the ShadowFed's announcement later today.