Currency upset

Press, 11 July 1983, Page 14

Currency upset

The foreign exchange markets continue to focus their attention on U.S. interest rates and money supply targets to gauge the direction of the U.S. currency, says Westpac Banking Corporation in its weekly foreign exchange report.

The dollar weakened Friday week ago in New York trading as operators sold dollars in anticipation of a fall in the week’s Ml money supply figures, coupled with book squaring ahead of the Independence Day holiday on Monday, July 4. However, Ml showed a small rise of $6OO million, which caused a strengthening of the dollar in late trading. The Federal Reserve Bank holds its Open Committee meeting on Tuesday and Wednesday, and many operators are concerned that the Federal Reserve will be under considerable pressure to raise the discount rate to 9 per cent. This places the Federal Reserve Bank in somewhat

of a dilemma, because by raising interest rates they face the possibility of slowing or even halting the U.S. economic recovery. Yet if they fail to bring money supply growth under control soon, they may be confronted with a renewed surge in inflation at a later date.

These factors pushed the U.S. dollar to its highs for the week of DMK 2.5720 and Yen 240.90, before profit taking brought the dollar lower again. It kept fluctuating wildly for the remainder of the week — down one day, up the next. The foreign exchange markets remain extremely nervous and volatile, and when the Federal Reserve Bank unexpectedly added liquidity to the system on Thursday, operators were quick to interpret this as a Bible signal by the Fed they did not intend to raise interest rates any higher. This caused further selling pressure on the U.S. dollar, bringing it down to

its current levels of DMK 2.5525 and Yen 238.90.

This general uncertainty will remain until Wednesday, at which time the market hopes the Fed will give a clear signal of its intentions.

“In the meantime, we continue to believe that the dollar will remain basically strong against the major currencies, underpinned by high U.S. interest rates and a strengthening economic recovery,” says the bank. Sterling strengthened significantly last week after, the recent announcement that the latest money supply figures were well above target. This news allayed market concern over a further cut in interest rates, and Sterling strengthened from $U51.5250 to 1.5430. This, coupled with growing evidence that oil prices are unlikely to decline any further, should enable Sterling to hold its recent gains, and perhaps strengthen further in the coming weeks, the bank says.