Currency Brief: Taper speculation underpinned by retail sales

on Dec 13, 2013
Updated: Oct 21, 2019

The dollar gained some ground for a second day after retail sales increased more than forecast last month, adding to speculation the Federal Reserve will move to scale back its $85 billion of monthly asset purchases at a meeting next week.

Monthly bond purchases aim to boost recovery by depressing long-term interest rates, weakening the dollar as a side effect, though talk of their dismantling can encourage the U.S. currency.
The euro fell from an almost a six-week high versus the dollar as data showed industrial production in the 17 nations that use the euro contracted in October, signaling once again the uneven nature of the economic recovery. .

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“Taper is discussed more as a threat right now than as a tool, but the possibility of it still supports the dollar,” Gouglas Borthwick, the head of foreign exchange at Chapdelaine & Co. in New York, said in a phone interview. “On the whole, the strong gain in consumer spending activity is consistent with the emerging narrative of a fast improving U.S. economic backdrop,” said Millan Mulraine, director of U.S. research and strategy at TD Securities, in a note.

Growth in the U.S. will accelerate in every quarter of 2014, starting at 2.6 per cent and building up to 3 per cent, while in the Group of 10 the overall forecast is for about 2 per cent for most of the year, Bloomberg surveys of economists show. As a result, a stronger economy may keep U.S. inflation levels higher than in other major nations, allowing the Federal Reserve to lead the world in reducing monetary stimulus that has weighed on the dollar.

No meaningful data is scheduled for release today. It seems that right now there is only one thing that matters to the markets and this is whether central banks will continue with quantitative easing and maintain interest rates at three-century lows, and if not, when they will stop printing money and get rates back to something close to normal levels.

In May, Fed Chairman Ben Bernanke suggested a 7 per cent or 6.5 per cent unemployment rate would be sufficient to start trimming its monetary stimulus bond-buying program. In November however, some Fed officials discussed whether 6.5 per cent was not a little on the high side, and suggested a 6 per cent target instead. The inflation threshold was also discussed last month.
The truth probably is that once the central banks slash interest rates to close to zero it is very hard to get them back up again. One good example of that is Japan which cut its interest rates to 0.5 per cent in September 1995 and nearly two decades afterwards, they still haven’t risen back again.
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