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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: abuelita who wrote (8711)	11/1/2002 1:37:27 PM
From: Jim Willie CB	Read Replies (1) \| Respond to of 89467

(BACKWARDS) Anticipation of a US rate cut already helps dollar Thursday October 31, 6:22 pm ET by Daniel Bases [I believe this analysis has it 100% BACKWARDS... the prospect of a Fed rate cut has undermined the USdollar, even as the stock market has risen... a rate cut would render the USTBond shorterm maturity yield even lower and less competitive with European bond yields... thus we saw the Euro reach near parity this morning... talk of a Fed "rescue" occurred precisely on the day of recent dollar weakness, promulgated in the WSJ, despite stocks showing surprising resilience to bad news... 100% BACKWARDS, indicative of illiteracy even among editorialists !!!] NEW YORK, Oct 31 (Reuters) - The rising prospects of an interest rate cut by the Federal Reserve next week in the wake of dismal economic data has helped limit the dollar's fall, analysts said on Thursday, as investors continue to reward the greenback for the central bank's pro-growth strategies. Since the market has already priced in a rate cut ahead of the Nov. 6 policy meeting, the likely effect on the dollar of reducing the four-decade low 1.75 percent benchmark fed funds rate even further is expected to be supportive, albeit muted. "People expect the Fed to come to the rescue next week," said Rebecca Patterson, currency strategist at J.P. Morgan Chase in New York, explaining why the dollar has not lost more of its value. "A rate cut next week is going to support the dollar. However, support will only be modest because the market already discounted the move," said Patterson. The expectations for a growth-boosting interest rate cut, however, could not stop the dollar from falling to a three-week low of 99.06 cents against the euro(EUR=) and near one-month low of 122.32 yen(JPY=) on Thursday. While these rates are well-within established ranges, they do reflect the unsettled state investors feel concerning the lackluster U.S. economic recovery. Recently, consumer confidence fell to nine-year low, while a report on Thursday showed Midwest manufacturing activity declined at a faster than expected pace and Friday's October U.S. unemployment rate is expected to show an increase. In 2001, the Fed cut interest rates 11 times in an effort to boost growth after the stock market bubble burst the year before and the global economy slumped into recession. The proactive rate cuts by the Fed led investors to reward the dollar, as investors stashed money in U.S. assets on bets that America would be the first among global economies to recover. Throughout the recession, the dollar strengthened. But economic growth is still lagging and consumer confidence is showing serious cracks, leading many markets participants to conclude the Fed may have little other choice but to reduce rates again in a bid to help boost the economy by lowering borrowing costs even further. The low inflation environment in the United States allowed the Fed to cut interest rates without the dollar feeling the ill-effects of interest rate differentials with the euro zone, where the benchmark refinancing rates stands at 3.25 percent. Higher benchmark interest rates traditionally attracts capital as investors look for higher investment returns. While the Fed is expected to cut rates, recent Reuters polls show a majority of economists expect both the European Central Bank and the Bank of England to leave their respective benchmark interest rates unchanged at their meetings on Nov. 6 and Nov. 7, respectively. THE NUMBERS SPEAK One quantifiable indication of the market's thinking has been the sharp spike up in short-dated interest rate futures after the consumer confidence data was reported on Tuesday. At that time, the market reflected a 90 percent chance the central bank would cut rates by 25 basis points on Nov. 6. Since then the percentage chance for a cut has increased. While the dollar on Thursday edged to fresh three week lows against the euro and 2-1/2 week lows against the Swiss franc and sterling, the moves themselves were modest. Anticipation of a rate cut can also be found in the U.S. stock market. Thursday's dour data was largely ignored. The Dow Jones Industrial average (CBOT:^DJI - News) fell 0.36 percent, while the broader S&P 500 stock index (CBOE:^SPX - News) lost 0.56 percent and the Nasdaq Composite index (NasdaqSC:^IXIC - News) rose a scant 0.23 percent. When the Fed meets it will have the benefit of using last week's disappointing consumer confidence data, as well as Thursday's Chicago Purchasing Manager's Index (PMI), which fell more than expected in October to 45.9. This is the second straight monthly drop in the Chicago PMI and provides a forward looking glimpse of final demand. A reading below 50 indicates activity is contracting. The PMI report also gives a good indication for national manufacturing performance. On Friday, the Institute for Supply Management reports its October manufacturing index results. Economists polled by Reuters expect the index will drop to 48.9 from 49.5 in September. Prior to the Chicago PMI report, third quarter U.S. gross domestic product, the broadest gauge of economic output, rose 3.1 percent, ahead of the second quarter's 1.3 percent growth rate, but below expectations for a 3.6 percent increase. U.S. consumer spending once again provided the big boost to growth. While the rate of economic growth in the third quarter more than doubled from the second quarter, the data is still backward looking. "Currency markets are apt to reward a proactive response from the Federal Reserve, which we believe is likely," wrote Marcel Kasumovich, head of G-10 foreign exchange strategy at Merrill Lynch, in a research note. "However, if the FOMC wants to send a strong signal to the market of being proactive, clearly a 25 bps rate cut will not -- it is already priced. Anything less than 25 bps would be a disappointment, which the FOMC would also wish to avoid. Suddenly the door is open for a 50 bps move," he said.