By Anne D. Picker, International Economist, Econoday
Monday, November 11, 2002

The Bank of England and European Central Bank decided to maintain the status quo and left their key interest rates unchanged at 4.0 percent and 3.25 percent, respectively. This means that, by default, the pro-active Federal Reserve has taken on the responsibility of stimulating world growth. The Fed surprised almost everyone and lowered the Fed funds rate 50 basis points to 1.25 percent on Wednesday. Analysts had been expecting a 25-basis-point cut. The Bank of England is concerned about soaring house price inflation and rising consumer credit, while the ECB continues to worry about excess money supply growth and inflation that is hovering just above its 2 percent ceiling. Britain continues to grow at a reasonable pace, but the EMU is barely growing, especially in the larger economies.

On Tuesday, the Reserve Bank of Australia kept its benchmark interest rate unchanged for a fifth month at 4.75 percent. The global economic slowdown is crimping the country's exports and a drought is cutting farm production. The central bank raised its benchmark rate 25 basis points in May and again in June to cool a housing boom that helped the economy grow 3.8 percent in the year ended June 30.

Now that the major central bank decisions are over, traders are free to interpret what they mean for the U.S. dollar - not an easy task. If last week is prologue, market players will pummel the dollar. They think the Fed knows something that no one else knows and they see the U.S. at an investment disadvantage due to the low rates. On the other hand, the U.S. is the only country that is pro-active and pro-growth at this time. To avoid being held hostage by the United States, the ECB needs to take the lead in generating its own economic growth. The dollar continued to fall under parity to the euro and it fell under 120 yen for the first time since early September. The weaker dollar puts those countries dependent on exports (Japan and Germany) at a relative disadvantage because it makes their goods more expensive especially in the United States.

Overseas markets were closed by the time the Fed made its interest announcement on Wednesday. However, U.S. equities markets initially responded positively to the move. And the U.S. dollar, which had already slipped below parity prior to the announcement, did little of anything as traders digested the surprising news. Thursday, however, was another story. Asian equities didn't react positively. Asian investors saw the report as an admission of weak U.S. fundamentals, which weigh on exporters who rely on U.S. markets for sales and profits. Europe and Britain were preoccupied by Thursday's actions from the Bank of England and ECB. Although the FTSE stayed positive after the Bank of England's announcement, the Paris CAC and Frankfurt DAX sank on the news of no interest-rate relief from the ECB. President Wim Duisenberg, in his press conference following the governing council meeting, said that the ECB discussed arguments for and against a rate cut, which was somewhat unusual for ECB meetings.

After a volatile week, equities were essentially mixed as investors tried to absorb the implications of the U.S. elections as well as the four central bank meetings. And if this wasn't enough, investors also needed to look at the implications of the UN Security Council's Iraqi resolution on Friday. This also had a big impact on the dollar. Seven of the equities indexes followed here rose anywhere from 0.1 percent (Japanese Nikkei) to 4.2 percent (South Korean Kospi). Six indexes fell from 0.1 (Singapore Straits and Nasdaq) to 2.7 (Frankfurt DAX).

Last Week's Highlights   •   Global Stock Market Indexes   •   Recap of Global Markets   •   Currencies   •  Indicator Scoreboard

The Bottom Line   •   Looking Ahead