Of most interest in the past week was the announcement by ECB Governing Council member Axel Weber at the G8 meeting (a meeting of leaders from Canada, France, Germany, Italy, Japan, Russia, the UK and USA) who stated a precautionary interest rate hike might be needed in the Euro zone in 2009. This surprised many market analysts because the European Central Banks Monthly Bulletin estimates the Euro zone will not see monthly growth until mid 2010. The ECB forecasts an annual contraction of between 5.1% and 4.1% in 2009 and 1% and 0.4% in 2010. This information could obviously impact on anyone thinking about going to
exchange foreign currency.
So why raise interest rates when all the forecasts look to the ECB falling well below its inflationary target? Axel Weber is voicing the ECBs concern that their may be an asset bubble forming ie the price of some assets, like housing, may become over inflated as money is taken en masse out of low yielding bank accounts and pumped into higher yielding assets like property.
If interest rates do rise then any recovery may be more subdued and delayed than previously thought. With the UKs interest rates at their lowest level for 300 years Axel Webers comment would suggest the UK may be more prone than most to this two tier economy with booming house prices but stagnating economy.
So with two world renowned, experts entrenched in their opposing positions who is right and when should I be considering taking advantage of
current exchange rates?
Opposing views create markets and ultimately it will take hind-sight to find out who is right for certain. But while the market remains unsure the effect of any fresh data release or news story is having a multiplied effect on currency fluctuations creating regular daily fluctuations in value of up to 2% (2,000 variation in return for every 100,000 converted). Never has it been more important to have your account open in advance and to be able to move quickly should a currency value spike in your favour.
Investors have started pricing in an interest rate hike in the US following the rise in oil prices (breaking $72 a barrel) and the market currently rates the likelihood of a hike before the end of 2009 as currently greater than 60%. The US is heavily dependant on oil and is therefore greatly affected by this rising cost. Raising interest rates is the Federal Reserves main tool in cutting the supply of money in the US economy and therefore reducing inflationary pressure. A rise may lead to dollar strength as investors move from lower yielding currencies in search of a greater return.
