Foreign Currency Report 18 August 06

The head of the International Monetary Fund has said that inflation risks and global trade imbalances mean the world economy faces "testing times".

Rodrigo de Rato added that deadlocked trade talks are another challenge ahead of a series of IMF and World Bank meetings in Singapore this week.

In its World Economic Outlook published earlier this week, the IMF predicted the global economy would grow 5.1% this year then 4.9% in 2007.

However, it forecast the US would see growth slow to 2.9% next year from 3.4% in 2006.

Mr de Rato said that global trade imbalances, seen especially in China's trade surplus and the US budget deficit, were "complex problems that took many years to build up" and that "It would be unrealistic to expect the problem to be resolved through a quick fix'.
He added that the world economy had shown resilience in the face of higher oil prices and rising interest rates.

USD

The US Dollar has weakened as investors gambled that the US Federal Reserve will not raise interest rates this week following tamer August inflation data.

Bank of New Zealand currency strategists said the US dollar has been boosted by the moderate US consumer price index (CPI) result, which hampered the local unit's performance.

The CPI rose 0.2 per cent following July's 0.4 per cent increase, while core prices (which excludes food and energy costs) climbed 0.2 per cent for the second month.

Reports show Americans are more optimistic about the outlook for inflation and the economy as gasoline prices dropped.

Kansas City Fed President Thomas Hoenig said the numbers were not as favourable as some would like "but they showed the CPI numbers down, and that's good news," he said, adding "how we balance those will be, I think, an important part of the discussion that goes forward."

Strategists forecast that some repositioning of US dollars after the Group of Seven conference in Singapore saying that people are wary because last time after the G7 meeting the US dollar fell quite significantly causing some anticipation of that happening again.

EUR

European Central Bank (ECB) have said officials said inflation pressures may persist beyond 2007, indicating that interest rates will continue to rise into 2007.

Council Members have announced at the IMF's annual meeting in Singapore that they 'still see quite strong inflation dynamics throughout 2007, into 2008'' . Klaus Liebscher, another board member, said in an interview today that there is a 'rising danger'' inflation will accelerate and that action is needed.

The ECB is preparing the ground to raise its main lending rate further after four increases since early December to 3 percent. Faster growth in the economy of the dozen Euro nations is giving workers room to ask for more pay and companies to pass on higher costs, leading to more persistent inflation.

Executive Board Members have committed to exercise 'strong vigilance'' against rising prices, a language used to signal the past four rate increases. The ECB's 18-member rate-setting governing council next meets on October 5th in Paris.

The euro-region economy is on track for its fastest expansion since 2000 as companies boost spending and hiring, bolstering consumer optimism. Growth will probably accelerate to 2.4 percent this year before cooling to 2 percent in 2007, the International Monetary Fund in Washington said last week.

Investors expect the ECB to raise the rate to 3.5 percent by the end of the year.

Opinions are divided on higher borrowing costs. The IMF has called on the ECB to be 'cautious'' when raising rates, and finance ministers urged the bank not to derail growth.

THB

Thai Baht has been Asia's best performer this year and is at an appropriate level, said Finance Minister Thanong Bidaya, indicating the baht's rally this year may be ending.

The baht had its biggest decline in a month, falling as much as 0.3 percent to 37.35 against the U.S. dollar. The currency is probably set to end the year at about 37.5 to the dollar, Thanong said in an interview in Singapore yesterday.

Rising exports and tourism revenue helped caretaker Prime Minister Thaksin Shinawatra's government post a current account surplus for a second straight month in July and helped bolster the nation's currency. Thailand may post a current account excess of $3.6 billion this year, or 1.8 percent of gross domestic product, according to Credit Suisse.

'The baht was quite weak in the previous two years, so it's a readjustment with trading partners,'' Thanong said. ``As long as we have a current account surplus, that's where the baht's'' level is appropriate.

Some economists including said the rally in the baht may not be over.
'`We see that inflow is still coming into Thailand,'' said Thanomsri, an economist at Phatra Securities Ltd. in Bangkok. ``It could strengthen to 37,'' against the U.S. dollar by the end of the year.''
Southeast Asia's second-largest economy may expand about 3.5 percent in the second half of the year after growing 4.9 percent in the first half, Thanong said.