Focus On Fed Policy Meeting - 21.9.2011

US Dollar The dollar fell slightly yesterday, but the demand for the world reserve currency is still strong. Treasuries also erased their decline after the International Monetary Fund predicted severe repercussions for global economic growth if Europe fails to contain its sovereign-debt crisis, renewing demand for a refuge. The world economy will expand by 4% in 2011 and 2012, the IMF said, compared with June forecasts of 4.3% in 2011 and 4.5% in 2012. The US growth projection for 2011 was lowered to 1.5% from 2.5%. As for yesterday’s macroeconomic data, builders began work on fewer homes than forecast in August, showing an industry that’s languishing more than two years into the US economic recovery. Housing starts dropped by 5% to a three-month low of 571000 in annual figures, Commerce Department reported showed. Concern over housing and this year’s growth slowdown may prompt Federal Reserve policy makers to propose new measures to bolster the economy when they conclude their two-day meeting today. Yesterday report also showed the number of building permits rose by 3.2% to a 620000 annual figures in August, the highest this year and a sign construction may stabilize. However, investors showed little reaction to a weak reading on the housing sector. Federal Reserve policy will definitly be a key investors’ focus today. A two-day meeting of the Fed’s policy-setting committee began yesterday and a statement on monetary policy will be released after the meeting concludes today. Many expect the Fed to announce other steps to help a struggling economy, including changing the composition of its securities portfolio so it holds more longer-term debt in order to lower longer-term interest rates. Euro The euro strengthened slightly against the dollar, the Swiss franc and was little changed against the Japanese yen as Greek Finance Ministry made a “good progress” in negotiations about the next bailout payment, according to the EU statement. German investor confidence fell in September to the lowest in more than two years and a half as Europe’s debt crisis and a global slowdown damped the outlook for growth. The ZEW Center for European Economic Research said its index of investor and analyst expectations, which aims to predict developments six months in advance, declined to minus 43.3 from minus 37.6 in August. That’s the lowest since December 2008. Economists expected a drop to minus 45. The euro’s declines were limited yesterday after a sovereign-rating downgrade of Italy by Standard & Poor’s, as the European Central Bank stepped into the market to buy Italian government bonds. The Italian government played down the S&P downgrade, saying in an e-mailed statement on Tuesday that the rating firm seemed to be responding more to press reports than actual facts. Today we’ll see no important macroeconomic data from the euro zone. The single currency traded in a narrow range against the greenback: 1.3679-1.3717. Swiss Franc The Swiss franc fell both against the US dollar and the euro as the Swiss government lowered its economic-growth forecasts for this year and next, calling the franc still “very highly valued” after the central bank imposed a currency ceiling against the euro. Swiss gross domestic product will rise by 1.9% this year and by 0.9% in 2012, the State Secretariat for Economic Affairs said. For comparison, in June it had forecast the economy to expand by 2.1% and by 1.5% this year and next, respectively. The Swiss economy is showing increasing signs of a slowdown after expanding in the second quarter at the weakest pace since emerging from a 2009 recession. The central bank on September 15 reiterated its pledge to defend a franc ceiling of 1.20 versus the euro to protect exports, while leaving borrowing costs at zero. According to yesterday’s reports exports slumped by 7% in August from the previous month, while imports increased by 0.9% during the same period.