Wednesday 23rd July 2008

The Dollar rallied sharply yesterday on hawkish comments from Paulson and Plosser…

With little in the way of economic data yesterday comments from Treasury Secretary Paulson and Philly Fed President Plosser were always going to be a key focus for dealers and neither man disappointed. Henry Paulson churned out the familiar party line that a strong dollar is important to U.S. interests and the underlying strength of the economy while Charles Plosser said that rising inflation could force the Fed to start raising interest rates before labour and financial markets recover.

Oil also played a part in the dollar’s rise as the price of a barrel of oil dropped $4.63 to a six week low of $126.40 as fears of tropical storm - expected to turn hurricane - Dolly hitting oil production sites in Texas receded.

Reaction to Paulson and Plosser was enough to offset an earlier slide in the dollar triggered by weaker than expected earnings announced by Wachovia. America’s fourth largest bank reported a record US$8.86 billion second-quarter loss and slashed its dividend for a second time this year. Wachovia had projected a US$2.6 billion to US$2.8 billion quarterly loss and added to the gloomy news by announcing it will slash nearly 11,000 jobs. The jobs news does not bode well for the US non-farm payrolls report due out next week which has already shown that the US economy has shed a total of 438,000 in the first six months of the year.

Incase anyone was interested the OFHEO US house price index fell 0.3% in May verses a fall of 0.8% in April taking the annual rate of decline in house prices to minus 4.8%. If you are still wondering OFHEO stands for the Office of Federal Housing Enterprise Oversight – Google rules.

Focus today will shift to the Bank of England when it releases minutes of the July MPC meeting at 9:30am BST. The question will be just how split is the committee? We can be fairly sure that Mr. Blanchflower voted for a cut but did anyone else join him or could there have been a 3 way split with one or more voting for a rate hike in order to curb inflation? The general consensus is that the vote was 8 to 1 to leave rates on hold.

Finally this evening (7:00pm BST) the Federal Reserve publishes its "Beige" book in which it reports anecdotal information gathered on the current economic outlook.

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