U S. money supply foxes forecasters

Press, 3 October 1983, Page 30

U S. money supply foxes forecasters

The United States money supply figures have once again got the better of the forecasters, revealing a decline of SUS3IOO million against expectations of a decline of only SUSSOO million, says Westpac Banking Corporation in its weekly foreign exchange report. This placed the Ml monetary aggregate even more comfortably within the Federal Reserve bank’s target range of 5 to 9 per cent, and led to renewed speculation that the “Fed” would ease its monetary policy soon.

As might be expected, the United States dollar declined on the foreign exchange markets after the money supply announcement on Friday, and continued to move lower last week. At its low, the dollar reached 236.20 yen, 2.6345 marks and £1.5030, but dealers are becoming very cautious of selling United States dollars aggressively as they have been caught badly in the last year by its resilience.

The August American trade deficit of SUS7I9O million was very high historically, but was in line with market expectations and did not affect the United States dollar.

On Friday the dollar rebounded against most other major currencies in United States trading after losing ground in Europe, while gold prices took the opposite course, rising in Europe but then slipping in American activity. Dealers said the dollar again appeared to follow changes in short-term United States interest rates, which determine yields of dollar-denominated investments. The Federal funds rate —

a closely watched charge on overnight loans between banks — opened at 8% per cent, climbed to 9 per cent, and later fell back to 8% per cent. “Traders keep keying on federal funds,” said John Fulton, chief foreign exchange dealer at Chemical Bank in New York. “And it’s overdone. The dollar is simply too high.” The yen performed the best last week, gaining strongly against the U.S. dollar. “We expect some consolidation at its present level; however, as a longer term strategy, we continue to regard this currency as a good buy at current levels,” says the bank. Sterling was largely ignored last week, and has failed to capitalise on the weakness of the United States dollar. Therefore, against the other major currencies it has been weakening substantially, mainly on market expectations of an imminent decline in British interest rates. Westpac says it believes sterling will remain weak; however, any significant escalation in the Middle East conflict between Iran and Iraq will serve to underpin this currency in the short term.

“Although the deutschemark has strengthened against the United States dollar, it is still exhibiting an underlying weakness against the other major currencies, and we expect this to continue,” the corporation report says. “The Reserve Bank of Australia has moved to discourage speculation against the Australian dollar by devaluing it 0.4 per cent during the past three days. However, because of the weakening U.S.

dollar, this has had little over-all effect on the sAustsUS midrate. We remain with our view that the revaluation of the Australian dollar will continue periodically in the months ahead. “Over all, we look for a period of consolidation for the United States dollar at current levels, but we believe that it will continue to move gradually weaker in the weeks ahead,” the bank says.