WHAT FINK MIGHT DO WITH BGI - FTSE

INTEREST RATE OUTLOOK: STEADY AS SHE GOES
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In the Markets
Dollar Down
But Not Out
In an effort to keep the economic recovery on
track, the Federal Reserve Board has made clear
its intention to hold rates at their current
bottom-scrapping levels well into next year.
Meanwhile, the dollar, having closed the gap
against numerous international currencies
during the first part of the year, is once again
back down—but not out, according to most
observers. From Boston, David Simons reports.
IN ITS MOST recent monetary
policy statement issued in late
June, the Federal Open Market
Committee indicated a willingness to
maintain a target range of 0%-0.25%
for Federal funds as part of the overall
effort to “employ all available tools to
promote economic recovery and to
preserve price stability”. With rates
skimming zero, the Fed’s focus in 2009
has shifted to quantitative easing
measures to help stimulate the
economy and the functioning of
financial markets, including
substantial purchases of Treasuries and
mortgage securities, says John Beggs,
chief economist, AIB Global Treasury.
“Given the very weak economic
conditions, with the unemployment
rate set to soon breach 10%, as well as
very subdued inflation, the current
exceptionally low level of the Fed
funds rate can be expected to remain
in place well into 2010 at least.”
Richard B Hoey, chief economist for
Dreyfus Funds, believes that
policymakers have correctly diagnosed
the current financial and economic risks
and have taken the proper steps to keep
the situation under control. Along with
a gradual recuperation of the financial
sector as it moves from “semi-orderly
deleveraging to orderly deleveraging,”
Hoey also sees the continuation of
extremely low interest rates worldwide
for an extended period.
Of course, it wasn’t all that long
ago that the Federal Reserve Board
went on a similar rate-slashing
campaign, chopping the Federal
funds rate from 6.5% to 1% during
2001-2003. Many observers still
believe that the Fed’s subsequent
about face, which took the rate from
1% to 5.25% during 2004-06,
effectively punched a hole in the realestate
bubble the Fed helped create.
Technology solutions
Conditions are markedly different this
time around, however, and strategists
such as Nick Colas, chief market
strategist for New York-based
ConvergEx Group, an institutional
agency brokerage and investment
technology solutions provider, aren’t
concerned about a repeat scenario
based on current monetary policy.
Still, the quantitative easing trend
does bear watching, he says. “For
instance, our offshore trading partners
worry that we are basically monetising
Photograph supplied by istockphotos.com, August 2009.
the debt, and the Fed is just printing
money to buy treasuries, which may
be perceived as a breach between the
separation of the central banks and
fiscal policy. The Chinese in particular
are concerned about the notion of
quantitative easing as a way of
monetising debt, because obviously if
this really were the case, the dollar
would weaken considerably—and
that would be a major problem.”
Hans Redeker, global head of
foreign exchange strategy at BNP
Paribas, says that the worldwide belief
the worst is over has furthered
optimism over the recovery process,
which in turn has provided support
for asset markets, as well as allowing
currencies to extend their rebound
against the dollar and yen. Indeed, the
perception that the market has
bottomed has negatively impacted the
dollar, as investors abandon cash
positions in favour of higher yielding
instruments. After staging a powerful
rally during the mass flight to quality
beginning late last year, the dollar has
since given back a good portion of its
gains. The British pound, which hit a
seven-year low of $1.35 against the
dollar in March, vaulted ahead of the
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