The dollar traded lower on further signs of stagflation Tuesday as US producer prices jumped more than expected and industrial production unexpectedly fell. The greenback is also pressured by reduced interest rate expectation on reports the Federal Reserve will not hike interest rates anytime soon. We believe the Fed has lowered rates too much. The Fed needs to lend freely to troubled banking institutions to ease the credit crunch and prevent systemic risk in the financial market, but it needs to do so at a significantly higher rate to avoid creating more inflation. The sooner the Fed hikes rates, the better for the US economy and the dollar.
The weakness in the real economy should be addressed by fiscal policy, preferable tax-cuts; the negative real Fed funds rate only makes the economic situation worse. Sterling was even weaker than the dollar as UK inflation rose but the Bank of England seemed unlikely to address the problem.
The USD/JPY fell slightly as US stocks declined on renewed financial-sector worries and more signs of economic weakness. The pair has been testing the 108-area resistance the last few days and the test is still not over. If this resistance is penetrated, the pair will rise to 110. There is support in the 106-area.
The weakness in the real economy should be addressed by fiscal policy, preferable tax-cuts; the negative real Fed funds rate only makes the economic situation worse. Sterling was even weaker than the dollar as UK inflation rose but the Bank of England seemed unlikely to address the problem.
The USD/JPY fell slightly as US stocks declined on renewed financial-sector worries and more signs of economic weakness. The pair has been testing the 108-area resistance the last few days and the test is still not over. If this resistance is penetrated, the pair will rise to 110. There is support in the 106-area.