Fed Hike, Risk Aversion Fuel Dollar Gains
The US dollar rose against most major currencies on news of the Fed rate hike. The Fed sent its clearest signal that emergency measures will be withdrawn. Fed Chairman Ben Bernanke and the Fed Board of Governors raised the rate charged to banks from 0.50% to 0.75%, the first increase since June 2006. The Fed said the decision was a “normalization” of lending and would not have any impact on US monetary policy. The Fed once again stated that rates would remain low for an ‘extended period.’ Despite the Fed statement investors increased bets that the Fed will tighten monetary policy sometime during the fourth quarter. Sung Won Sohn, an economics professor at California State University stated, “The discount rate historically has always been used as a psychological tool for signaling the future course of monetary policy. The bottom line is the Fed is signaling that in the future rates are more likely to go up, rather than stay stable or go down.”
Dollar at Nine Month High vs. Euro
The Fed rate for overnight borrowing between banks has been kept at 0 to 0.25% since 2008 and the Fed indicated that rates would remain low for the foreseeable future. Fed officials have warned banks to be prepared for increased borrowing costs and are keeping close tabs on economic conditions. Kelly King of BB&T Corp. said the Fed’s announcement was, basically a psychological message to the marketplace that at some point the Fed does have to begin to pay attention to the potential of inflation down the road. I don’t think they are going to be moving short-term rates anytime in the very near future.” The Fed announcement and the rise in risk aversion sent the dollar to a nine month high against the troubled euro. The greenback traded at $1.3517 vs. the euro and is headed for a sixth straight week of gains on the euro.
Greece Needs $70 Billion This Year
Most of the Euro’s troubles are blamed on Greece’s debt crisis which only seems to be getting worse. In Germany and the Netherlands public opinion polls show strong support for kicking Greece out of the EU. This week a supporter of German Chancellor Angela Merkel said that “not a single euro” should be spent to help Greece. The Athens government needs to raise 53 billion euros ($70 billion) this year. In May the Greek government is threatened by 16 billion euros of bond redemptions. Philip Wee of DBS Group Holdings Ltd. Stated, “With sovereign debt risks weighing on the euro-zone and Japan, the dollar appears to have the relative advantage over the euro and the yen.”
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