Expert Analysis of Today's Market

Dollar Rallies on Strong Inflation

Hans Nilsson 2007-12-14

The dollar rose against major currencies on Friday after stronger-than-expected US consumer inflation. Larger-than-forecast numbers on inflation and retail sales have changed the outlook for the US economy and the chance of aggressive Fed interest-rate cuts. The central banks’ liquidity plan may help alleviate credit market concerns and help the Fed to address the credit crunch without additional rate cuts. Despite lower equity prices, the yen fell as a Bank of Japan survey showed business confidence declined for the first time since March.

The EUR/USD declined the most since May 2005 on speculation the Fed will not cut interest rates as aggressively as earlier thought. After breaking the 1.45 support, the pair is trading below that level, which now acts as resistance. This important resistance is the neck-line in a head-and-shoulder top, indicating further drop in the pair.

Financial and Economic News and Comments

US & Canada

The US consumer price index increased a larger-than-expected 0.8% m/m and 4.3% y/y in November, led by higher gasoline prices, the Labor Department said. The core CPI also rose a stronger-than-expected 0.3% m/m and 2.3% y/y. The increasing inflationary pressure creates a dilemma for the Federal Reserve, as it comes at the same time the economy is slowing.

US industrial production increased 0.3% m/m in November after a downward revision to -0.7% m/m for October. Capacity utilization rose to 81.5% in November after downward revisions to the previous three months. Industrial production is growing at a modest 2.1% y/y.

Interest-rate futures on the Chicago Board of Trade showed traders had reduced bets on Fed rate cuts. The odds of a quarter-percentage point cut to 4.0% next month were 80%, after the inflation report, down from 100%.

Europe

European inflation accelerated in November to the fastest pace since May 2001 as food prices soared. EMU inflation rate rose a faster-than-expected 0.5% and 3.1% y/y in November, from 2.6% y/y in October, the European Union’s statistics office said.

Asia-Pacific

The Tankan sentiment index of large Japanese manufacturers fell more than expected to 19 in December from 23 in September, the Bank of Japan said.

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