Dr. P.V. Viswanath



Economics/Finance on the Web
Student Interest


Dollar Firms, Stocks Slip


September 20, 2004 By REUTERS filed at 6:36 a.m. ET

LONDON (Reuters) - Investors prepared Monday for an expected hike in U.S. interest rates, lifting the dollar and lowering bonds prices while European stocks slipped on corporate earnings worries.

Oil climbed above $46 a barrel, adding to investor concerns, on a mix of weather- and export-related supply disruptions.

The key issue on many investors horizon was the U.S. Federal Reserve's Tuesday meeting at which it is widely expected to lift interest rates by 25 basis points after similar hikes in June and August.

This would take the federal funds rate to 1.75 percent, still low but a clawback from essentially emergency levels reached following the bursting of the internet bubble and the September 11, 2001 attacks on the United States.

Investors will be looking for hints about future moves.

``As at the previous two...meetings, markets will focus on what the Fed says rather than what the Fed does,'' said American Express Bank in an outlook.

``In keeping with its recent public comments, we expect a somewhat softer tone: optimism on economic growth sprinkled with some qualifications, plus continuing conviction that inflation pressures have eased.''

One wild card on the inflation front, however, is the volatile price of oil.

U.S. light crude was at $46.28 a barrel, up 69 cents on the day, after Russia's YUKOS suspended some oil exports to China and traders remained concerned about storm-related supply disruptions into the United States.

London's Brent crude was up 52 cents to $42.97 a barrel.

``When these supply issues crop up in a tight market, there will be bite to prices. I don't see that abating soon,'' said Daniel Hynes, an industry analyst at ANZ Bank in Sydney.

``We are going to see prices between the $40-45 range for a while.''


The dollar held firm against the euro and yen, buoyed by the widespread Fed rate hike expectations.

``It's unlikely people will be taking big positions in the lead up to the...meeting. (It) will probably maintain a slightly hawkish tone which will give some near term support to the dollar,'' said Adrian Foster, chief foreign exchange strategist at Dresdner Kleinwort Wasserstein.

The euro was a third of a percent down from late Friday's closing levels at $1.2152, in the middle of its recent range.

The dollar was around 0.2 percent firmer on the yen at 109.76 yen, also in the middle of its recent range.

Japanese markets were closed for a holiday.

European shares fell as oil prices rose and a profit warning from consumer products giant Unilever fanned concerns over the quality of upcoming corporate results.

The Anglo-Dutch blue chip trimmed its 2004 earnings guidance after trading in July and August came in below expectations.

``The warning was unexpected,'' said David Fineberg, a trader at CMC Group. ``This kind of news will strengthen a trend in which people come out of companies that carry high risk and look at potential takeovers and cash-rich companies that inject cash back to the shareholders.''

The FTSE Eurotop 300 index of pan-European blue chips was 0.58 percent weaker while the narrower DJ Euro Stoxx 50 index was 0.71 percent lower.

Japanese markets were closed for a holiday.

Euro zone government bond yields were flat-to-higher with many sitting pat before the Fed meeting Tuesday.

The interest rate-sensitive two-year Schatz yield was up 1.2 basis points at 2.563 percent.

The 10-year Bund yield was up flat at 4.024 percent.




  1. What caused the dollar to firm up? Relate your answer to theories of exchange rate determination.