Traders cautious before Fed meets

PUBLISHED : Sunday, 22 September, 1996, 12:00am
UPDATED : Sunday, 22 September, 1996, 12:00am

THE US dollar hovered within a narrow range last week, while investors waited for the result of the Federal Reserve Open Markets Committee meeting on Tuesday.

Weaker than expected August Producer Price Index and Consumer Price Index figures the previous week reduced market expectations of a strong rate rise in the US, and the dollar failed to rally further.

The unexpected widening of the July trade deficit, which rose 42.6 per cent to US$11.68 billion, triggered selling of the dollar mid-week. The market had forecast an overall deficit of $8.8 billion.

The dollar partially recovered following the release of a strong housing starts figure which jumped 4.5 per cent in August. This bolstered renewed hoped that the Fed might have to raise rates.

Higher US rates are likely to boost the dollar as widening interest rate differentials makes dollar-denominated deposits more attractive, especially when Japanese and German rates are at record lows.

Japan's discount rate should remain at a historic low of 0.5 per cent. GDP growth fell 0.7 per cent in the second quarter, reinforcing expectations that the Bank of Japan would not raise interest rates.

The dollar-yen rate is expected to trade higher amid expectation that Japanese interest rates will remain low while US rates may rise.

In Germany, an unexpected acceleration in M3 money supply growth dampened expectations of a near-term German rate cut. M3 grew at an annualised rate of 8.7 per cent in August, up from 8.6 per cent in July.

The Australian dollar was under pressure amid talk the Reserve Bank of Australia would cut interest rates again soon. The August unemployment rate rose to 8.8 per cent from 8.5 per cent in July. Investors began switching from the Australian to the New Zealand dollar which rose to an eight-year high of 69.96 cents against the US dollar.

Further strong gain is seen to be limited ahead of the New Zealand general election on October 12. Helen Ng is the head of fund management services at BNP Private Banking Asia.