Monday, January 27, 2003
The dollar took it on the chin last week, falling to new three-year lows as investors' nerves were strung tight by U.S. President Bush's inflammatory rhetoric on Iraq and the growing dissention among allies on the gravity of Iraq's misdeeds. The financial burden of the looming war would fall upon the U.S. and with it, as the markets perceive it, even slower economic growth, making U.S. investments less attractive. Equity investors weren't thrilled by the news either and stocks were particularly hard hit in Europe and the Americas. On the week only the Nikkei and Topix rose, and only slightly. All others followed here sank anywhere from 0.6 percent (Singapore Straits Times) to 6.9 percent (Frankfurt DAX).
Central banks do the expected
Both the Bank of Canada and the Bank of Japan left their monetary policies unchanged last week. The Bank of Canada left its key interest rate at 2.75 percent. The Bank of Canada, in its quarterly monetary policy report, said it expects inflation to be above its one to three percent target range, due to higher-than-anticipated core prices and strong domestic demand. Nevertheless, they estimated that the economy slowed to an annual growth rate close to potential (3 percent) in the second half of 2002. The slowing reflects the effects of financial and geopolitical uncertainties and weakness in the global economy.
The Bank of Japan, with a zero interest rate policy (ZIRP), did not increase the amount of bonds it would buy from lenders to prop up the economy. The central bank instead will watch how the stock market performs in the run up to the March 31 fiscal year-end, when banks and companies must book investment losses before injecting extra cash into the economy. Investment losses could push some firms into insolvency. Last year, the Nikkei dropped to an 18-year low seven weeks before the fiscal year-end. That prompted the bank to expand its monthly bond buying. Falling prices continue to squeeze the economy by cutting corporate profits, eroding the value of real estate and creating new bad loans faster than lenders can dispose of old ones. The central bank cut interest rates close to zero in March 2001 and has tripled its monthly bond purchases during the past two years to pump more cash into the economy. But this has failed to reverse price declines and a six-year contraction in bank lending.
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Bad nerves getting upper hand