Daily Insight

The U.S Dollar plummeted to a new record low against the Euro last night and also fell to a fresh 26-year low versus the Pound after the Federal Reserve cut interest rates by a further 25 basis points in the monthly FOMC rate announcement.

The Dollar had been under constant scrutiny this week amid speculation that the Fed would lower rates by as much as half a percentage point for the second month in succession.

However, Fed Fund Futures had priced in a 98% probability of a quarter-point reduction but the accompanying statement failed to provide any clear indication on future policy. Indeed, the tone and language used in the statement is being interpreted as neutral while leaning towards slightly hawkish as the Fed acknowledged that economic growth had picked up in the third quarter.

The report from the Commerce Department showed that growth in the economy unexpectedly accelerated in the third quarter as a weak Dollar propelled U.S exports while strong consumer spending and business investment supplemented a further plunge in housing.

Despite the blistering pace of growth, Fed policy makers elected to cut the benchmark lending rate to 4.5% and the Futures market is already pricing in a 30% probability of rates falling to 4.0% by turn of the year.

However, the tone of the FOMC statement last night seemed to suggest that policy makers had already done enough to prevent the economy from stalling and that the recent increases in energy and commodity markets could put renewed upward pressure on inflation.

The remarkable appreciation of the Euro saw the single currency briefly touch 1.4500 against the ailing U.S currency and achieve the highest level of exchange on record as European inflation accelerated more than initial forecasts in October.

Considering that the Euro has risen 11% against the Dollar over the past year alone, the European Central Bank seem remarkably unperturbed with the possible implications on the economy and certainly the impact on export demand.

A number of members of the ECB's governing council, including the chairman Jean-Claude Trichet, have taken a staunchly hawkish stance on monetary policy amid concerns that inflationary pressures are rising.

The flash estimate of Euro-zone consumer prices showed that inflation had accelerated faster than initial forecasts in October while confidence in the economy declined. The rate of inflation in the region rose to an annual rate of 2.6% last month from just 2.1% in September as consumer prices rose at the fastest pace in two years.

As a result, the Euro may continue to make gains against the Dollar amid speculation that the ECB will be forced to raise interest rates from the current 4.0% in order to bring inflation back towards the 2.0% target.

The Pound's unrelenting rise against the Dollar took the U.K currency to a fresh multi-decade high last night as the Federal Reserve lowered interest rates for a second consecutive month and UK house prices rose at the fastest pace since June.

The Nationwide index showed that the average cost of a home increased 1.1% in October as prices increased 9.7% from this stage last year. The resilience in the UK property market provides an indication that the issue of supply and demand is cushioning homeowners against the effects of higher interest rates.

The Bank of England have raised the benchmark lending to the highest level in six years while the recent credit crisis is expected to cool the housing market in 2008. The report yesterday is at odds with recent evidence from Hometrack Ltd who said that rising credit costs are bringing the UK housing boom to an end.

Nevertheless, the Pound rose for a fifth straight day against the Dollar and has also touched 1.4400 against the Euro this morning amid speculation that the BoE will keep interest rates on hold for the remainder of the year.

Data Released 1st November

UK 09:30 CIPS Manufacturing PMI (October)

UK 11:00 CBI Distributive Trades Survey (October)

U.S 12:30 Initial Jobless Claims (w/e27th October)

U.S 13:30 Personal Income / Expenditure (September)

- Core PCE

U.S 14:00 ISM Manufacturing (October)

U.S 14:00 Pending Home Sales (September)

written by Adam Solomon