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Strategies & Market Trends : Trader J's Inner Circle -- Ignore unavailable to you. Want to Upgrade?

To: Canuck Dave who wrote (14743)	5/18/1999 1:01:00 PM
From: snerd	Respond to of 56535

Some while-you're-waiting reading: Mkt bracing for possible dlr slump on Fed-analysts (Reuters 05/18 11:47:54) By Svea Herbst-Bayliss NEW YORK, May 18 (Reuters) - Anxiously awaiting clues on the direction of U.S. interest rates, currency dealers braced for the possibility of a sharp dollar sell-off this afternoon if the Federal Reserve shifts toward tighter monetary policy. "The dollar's reaction could be very big and we may see it falling one to two big figures depending on the wording of the Fed's statement and the asset markets' reaction," said Warburg Dillon Read analyst Tomas Jelf. Although a shift to a tightening bias would come as no surprise, the details of the Fed's expected announcement could touch inflation-sensitive nerves in asset markets. Higher U.S. interest rates would ordinarily boost the dollar, but traders fear the prospect of selloffs in stock and bond markets could hurt it this time around. Nearly two-thirds of U.S. primary dealers polled by Reuters on Monday expected the Federal Open Market Committee to move toward a "tightening bias" - signaling a greater likelihood of higher rates in the not-too-distant future. But few expect the group to raise its key federal funds rates from 4.75 percent. By noon, trading had slowed to a trickle leaving the dollar slightly softer against the yen at 123.09/19 but a touch firmer against Europe's single currency at $1.0675/78 as traders refused stake out new territory. "It is simply too dangerous to do anything right now," one dealer admitted. The stock and bond markets fared better after having been rattled for two consecutive sessions following news that April's consumer price index jumped at its fastest pace in nine years. Because markets appear to have priced in a near-term tightening, some dealers see only a modest dollar reaction in case of a tightening. But as the countdown continued to the Fed's statement, expected at 1415 EDT, market players focused more on how the news will be presented than what it will actually be. "If the Fed brings up some of the variables the market has been wrestling with like tight labor markets and productivity, we could have a huge stock market sell-off and the dollar could be hit hard," Jelf continued. On the other hand, "If the statement said only that a tightening bias had been adopted without any rationale, the market may not know what to think," said Michael Andrews, chief U.S. economist at WestLB Global Treasury, agreeing that special statements could worry the market about the future. In the event the Fed says nothing about its bias, the market would likely conclude no change has been made. Dealers said the dollar would be taking its cues from the inflation conscious stock and bond markets. Mark Gargano, head of currency derivatives at First Union National Bank added "Higher inflation numbers aren't necessarily good for the currency and I don't see this as being bullish for the dollar at all." He argued that European inflation rates are likely to "stay calmer than ours and so real rates are going to favor the euro." If the dollar suffers more than a knee-jerk sell off on the back of a tightening bias, dealers said it could go into a sharp decline until the Fed speaks again. "Then all eyes would be on what (Fed Chief Alan) Greenspan says next," Warburg's Jelf said. Greenspan is scheduled to testify before the House Banking Committee on Thursday at 1000 EDT. ((--N.A. Treasury Desk, 212-859-1639 )) REUTERS