USA dollar jumped to the highest level since April. The unemployment rate fell, pushing down the headline unemployment to 5 per cent. Interestingly, nearly all jobs have been added in the 55-69 age group while workers aged 25-54 have actually lost 35,000 jobs! The economic conditions seem to line up with what the central bank is looking for, but housing starts plunged over 11 percent and inflation isn’t where it wants it to be.
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It is a similar situation in emerging markets, which have seen central banks from Indonesia to Brazil pulling back from tightening monetary policy because of growth concerns.
Commodity currencies tumbled as metal prices plunged to multiyear lows. The stronger U.S. dollar is equivalent to two or three rate hikes, said Fidelity worldwide global economist Anna Stupnytska. One main reason for this positive reaction is that the Fed reiterated that the pace of rate hikes will be “gradual”.
A suggestion in the minutes of the Fed’s last meeting that the bank would move cautiously on rates prompted the short covering.
Warning that “an overly aggressive increase in rates would at most benefit savers only temporarily”, she argued in the letter released on Monday in Washington that the Fed’s seven-year era of zero rates had sheltered American savers from dramatic declines in the value of their homes and retirement accounts.
The dollar has rallied strongly on rate hike expectations while gold slipped for precisely the same reason.
The dollar appreciated 0.1 per cent to US$1.0636 (RM4.54) per euro at 5pm NY time.
So, the need for a rate hike is settled. Regardless of whether the rate hike comes as a surprise or not, a rise in interest rates in a country like the U.S.is bound to exert an impact on the world economy.
Silver has been hit especially hard among precious metals because there’s less demand for its industrial applications, like solar panels, and the strengthening dollar makes it less appealing to investors.
What if rates aren’t raised?
After keeping markets on the edge of their seats for the better part of the year, the United States Federal Reserve has signalled that it is finally prepared, rather belatedly, to lift interest rates for the first time in 10 years.
After the pullback, prices would remain low since the market has been totally convinced there will be a rate raise, and it will come, no matter what the specific date will be when it’s instituted. And that will probably continue to be the deciding factor in how it acts over the next 12 months. They think the Fed should hold off for a bit longer.
Fernando Barciela | The Federal Reserve’s minutes which were released last Wednesday show that a rate hike is firmly on the cards for this December.
“There’s more risk now that, if they don’t raise in December, then people will worry that we’re still not out of the woods”, Jerry Braakman, chief investment officer at First American Trust, in Santa Ana, California, told Reuters.
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Gold fell 1% on Monday, nearing last week’s 2010 low on a robust dollar and upbeat comments from Federal Reserve officials on a possible United States rate hike next month.
