Sterling weaker on stagflation fears; US dollar stronger

Sterling weaker on stagflation fears; US dollar stronger

Story link: Sterling weaker on stagflation fears; US dollar stronger

TAGS:

The US dollar was stronger on Monday. Factors helping the greenback included continued indications that the Federal Reserve will continue to raise US interest rates and support from Japanese investors, who seemed more inclined to buy dollars.

Also seen as dollar positive is the Homeland Investment Act, a yearlong tax break meant to encourage US multinationals to bring foreign-held earnings back home to the US. This is seen as encouraging capital inflows into the US before the Act’s deadline at the end of the year.

Bad news, in the form of weak economic data released late last week, was downplayed by analysts who said that talk of stagflation in the US was misplaced.

The US dollar gained 0.6 percent to ¥114.8 in relation to the yen, while it was up 0.3 percent to $1.2033 against the euro.

Comments from the European Central Bank’s chief economist that oil prices will keep eurozone inflation over 2 percent at least through 2006 did not help the euro, although the remarks were seen as a sign that the ECB is ready to raise interest rates if necessary.

The euro was up 0.3 percent to ¥138.23 in relation to the yen.

Stagflation is seen as a more real possibility in the UK as oil prices are perceived as raising inflation, at least in the short run, while dragging on the economy. In addition, another uncertainty was added to the economic picture in the UK when Sir Andrew Large, who dissented 9 times from the majority in interest rate votes in 3½ year with the Bank of England, unexpected announced on Monday that he will leave the Bank in January. He will be replaced by Sir John Gieve, whose position on interest rates and other economic issues is not well known.

Sterling fell 0.6 percent to $1.7551 in relation to the US dollar, and dropped 0.3 percent to £0.6859 versus the euro.