Currency report
Concern over the surge in the United States money supply has caused world financial markets to reassess their vigw that interest rates would soon decline, says Westpack Banking Corporation in its weekly foreign exchange report.
The market had been expecting a decline in Friday’s Ml figure of SUS2 to SUS 4 billion, which would have left room for the ■ Federal Reserve Bank to lower the discount rate another notch. However, the actual figure of plus SUS4OO million was much higher than expected, and participants now believe that the “Fed” will prefer to wait and monitor the money supply growth during the next few weeks.
Although United States interest rates are likely to be underpinned at current levels, most participants still feel the “Fed” is unlikely to tighten the credit markets, even if money supply continues to exceed the upper end of their target range. They believe the “Fed's” concern over the weakness of the United States economy to be the over-riding factor, and unless the Ml growth accelerates drastically, the “Fed” will maintain its easier monetary policy.
The dollar continues to surge upwards to new highs. European interest rates have declined this week while United States rates have remained steady to firmer. In addition, the dollar's attraction as a refuge currency continues unabated, particularly in light of the increasing tensions in the Middle East.
The Japanese yen has
again exhibited considerable weakness, particularly after a Japanese official stated that the Bank of Japan would not defend the yen at any specific level. The Bank of Japan has recently spend billions of United States dollars in defence of the yen, but this has merely slowed the yen’s decline, rather than reversing the trend. On Friday the chairman of the Federal Reserve Board, Mr Paul Volcker, announced that the "Fed" would be placing less emphasis on its key measure of United States money supply, but said the shift was because of technical distortions in the measure and not a basic change in monetary policy.
He said that the “Fed" would change, at least temporarily, the emphasis it placed on the widelywatched Ml measure of money supply, because of distortions caused by the introduction of new types of deposit accounts at banks. Ml is the amount of money in circulation plus all checking accounts. Mr Volcker’s announcement capped a week of intense press speculation that the “Fed" had decided to ease its tight money policy and permit lower interest rates because of fears about continued weakness in the economy.
The prospect of a less restrictive money policy sent the Wall Street stock market soaring, with the boom fueled in part by major banks which lowered lending rates for their most creditworthy corporate customers by half a percentage point to 13 per cent.
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Press, 11 October 1982, Page 28
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461Currency report Press, 11 October 1982, Page 28
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