Record oil and food
prices pushed inflation in Germany to 3.4% last month, squeezing disposable
incomes just as the euro's gains and a deepening U.S. housing slump curbed
demand for exports. But as we have written in the past, the markets know that
the ECB will continue to focus on rising inflation, maintaining their hawkish
bias. These higher interest rates should continue to keep the euro well bid vs.
the U.S. dollar.
One currency that couldn't rally vs. the dollar over the weekend was the
British pound, which continues to drop from $2.01, which it hit in mid-July. The
UK economic situation is basically a copy of what we are facing here in the U.S.
Data released today showed UK house values fell by the most in at least seven
years in July. The report also stated that the property slump will continue for
months. Prices fell 1.2% from June, the biggest annual drop since the index
started seven years ago. The UK economy looks headed for a recession, and the
BOE may have to drop rates after it left the key rate at 5% on July 10. I
wouldn't be surprised to see the pound fall to $1.90 by year end.
Another currency that dropped vs. the US$ was the Chinese renminbi, which
fell 0.2% over the weekend. This was the largest decline since the dollar peg
was dropped in 2005. The fall came after the Chinese Politburo signaled a shift
in focus to maintaining economic growth, fueling speculation they will slow
gains to aid exporters. The Politburo, the Communist Party's top decision-making
body, wants to cool inflation and maintain "steady and relatively fast"
expansion. We could see the renminbi's appreciation slow significantly in the
second half of 2008, as the government replaces preventing overheating with
maintaining growth among its top priorities.
But don't look for a major fall in the value of China's currency. China will
keep the renminbi stable in a "self-initiated controllable and gradual manner,"
the People's Bank of China said in a statement on its Web site yesterday, after
the monetary policy committee's second-quarter meeting. The statement didn't
reiterate the central bank's pledge to "increase the exchange rate's
flexibility," included since the third quarter of 2007. The omission of
"flexibility" is being seen as a signal that the central bank will slow the pace
of renminbi gains. But I will again remind everyone not to expect any big moves
in the renminbi, as the currency is not allowed to trade outside a 0.5% band
against the dollar on either side of the so-called central parity rate, which is
set by the government.
The Australian dollar held on and actually moved up slightly over the weekend
after falling to a three-week low on Friday after ANZ Banking Group Ltd joined
National Australia Bank Ltd in warning of increased provisions for
non-performing loans.
