- The dollar fell sharply on Tuesday against other major currencies on falling US home prices and sinking consumer confidence to a 5-year low. The greenback extended its losses after Federal Reserve Vice Chairman Donald Kohn said credit-market woes and slower economic growth pose a “greater threat” than inflation.
- The EUR/USD rose on the unexpected rise in German business conditions and the yield advantage to the dollar, prompting investors to pare bets on European Central Bank interest-rate cut. Meanwhile, the rising US producer-price index did little to change expectations of another Fed rate cut. The EUR/USD traded above the all-time high of 1.4966 following Kohn’s growth concerns. Our short EUR/USD position stopped out.
Financial and Economic News and Comments
US & Canada
- The US producer-price index rose a more-than-expected 1.0% m/m and 7.4% y/y in January, the Labor Department said. The 7.4% climb is the largest since 7.5% in October 1981. The core PPI also increased a more-than-expected 0.4% m/m in January. The data highlights the Federal Reserve’s dilemma in dealing with rising inflation and a weakening economy.
- The Conference Board consumer confidence index fell more than forecast in February to 75.0, the lowest since March 2003, from 87.3 in January, the Conference Board reported. The present situation index decreased to 100.6 from 114.3. The expectations index declined to 57.9 from 69.3. Lynn Franco, Director of the Conference Board Consumer Research Center, stated: “With so few consumers expecting conditions to turnaround in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase.”
- The S&P/Case-Shiller home-price index dropped 9.1% in December 2006, after a 7.7% decrease in November. Nationwide, home prices fell 8.9% in Q4 2007 from a year earlier, the biggest decline in 20 years of record keeping. “Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates,” said Robert J. Shiller, professor at Yale University and chief economist at MacroMarkets LLC.
- The Federal Reserve Bank of Richmond manufacturing index increased to -5 in February from January’s reading of -8. Among the index’s components, shipments gained 13 points to -4, new orders moved down 2 points to -5 and the jobs index inched down 3 points to -5. The service sector revenues index settled at 1 in February from January’s -12, while the retail revenues index moved to -25 from -30. Overall, economic conditions in the Richmond Fed district remain weak in February.
- Federal Reserve Vice Chairman Donald Kohn said the credit-market turmoil and the possibility of slower economic growth pose a “greater threat” than inflation. “I do not expect the recent elevated inflation rates to persist….The adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States,” Kohn said in a speech to the University of North Carolina, Wilmington.
- The Ifo German business climate index unexpectedly rose to 104.1 in February from 103.4 in January. The current business conditions index rose to 110.3 from 107.9. However, the business expectations index dropped more than forecast to 98.2 from 99.
- The Confederation of British Industry UK retail sales index fell to the lowest in 15 months in February. The survey of 157 retailers showed 34% sold more goods than a year earlier and 36% sold fewer. The net rounded balance of 3 percentage points was the lowest since November 2006. The index of optimism at stores fell to -9 in February from -1 in November, the CBI reported. The index of selling prices rose to 50 in February, the highest since August 1996, from 42 in November. The index of expected prices was at 48.
- The yuan declined for a third day on speculation the People’s Bank of China may want to slow gains to limit the impact on exporters. Chinese banks should avoid one-way bets on the yuan to gain as “the yuan may depreciate in the future,” said Deng Xianhong, deputy director of the State Administration of Foreign Exchange.
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