Tag: stimulus

Dollar soars on news of diminishing US stimulus

dollarThe dollar soared Thursday as global markets reeled from the US Federal Reserve’s signal it may start to taper its massive stimulus this year.

News of a cash crunch in China also sent jitters through the market, driving investors into the safe-have dollar.

The euro fell to $1.3223 around 2200 GMT from $1.3297 late Wednesday.

The dollar jumped against the Japanese currency, to 97.27 yen from 96.39 yen, while the euro rose to 128.62 yen from 128.24.

“The price action in the US dollar today confirms that yesterday’s Federal Reserve meeting marked a major turning point for the greenback,” said Kathy Lien of BK Asset Management.

Stock markets across the globe and commodity prices swooned after Federal Reserve Chairman Ben Bernanke said Wednesday that the central bank could begin to wind down its $85 billion-a-month stimulus program as early as this year if the US economy continues to improve.

Analysts said the markets focused on the timetable for the tapering instead of the Fed’s statement that any move is conditional on the economic outlook.

The world’s reserve currency also benefited from renewed concerns about slowing growth in China, the world’s second largest economy, after weak manufacturing data.

Lien noted that interbank overnight lending rates in China had spiked to a record high in a rise that began two weeks ago, but the central bank has refrained from injecting money into the system.

The situation was made worse by weakening economic data, she said.

“Now China finds itself in a liquidity crunch begging for the central bank to step in,” Lien said.

“The central bank however refuses to do because they want to punish speculators and are in the midst of reforming the economy but the longer they hold off, the more disruption it will have on China’s economy and the global financial markets.”

The dollar rose to 0.9275 Swiss franc from 0.9277 late Wednesday.

The pound, however, was stronger against the greenback, fetching $1.5501, up from $1.5483. – AFP

Stunning drop in US GDP

The U.S. economy posted a stunning drop of 0.1 percent in the fourth quarter, defying expectations for slow growth and possibly providing incentive for more Federal Reserve stimulus.

The economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles.

The Commerce Department said Wednesday that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That’s a sharp slowdown from the 3.1 percent growth rate in the July-September quarter.

The surprise contraction could raise fears about the economy’s ability to handle tax increases that took effect in January and looming spending cuts.

Still, the weakness may be because of one-time factors. Government spending cuts and slower inventory growth subtracted a total of 2.6 percentage points from growth.

And those volatile categories offset faster growth in consumer spending, business investment and housing — the economy’s core drivers of growth.

Another positive aspect of the report: For all of 2012, the economy expanded 2.2 percent, better than 2011’s growth of 1.8 percent.

The economy may stay weak at the start of the year because Americans are coming to grips with an increase in Social Security taxes that has left them with less take-home pay.

Subpar growth has held back hiring. The economy has created about 150,000 jobs a month, on average, for the past two years. That’s barely enough to reduce the unemployment rate, which has been 7.8 percent for the past two months.

Economists forecast that unemployment stayed at the still-high rate again this month. The government releases the January jobs report Friday.

The slower growth in stockpiles comes after a big jump in the third quarter. Companies frequently cut back on inventories if they anticipate a slowdown in sales. Slower inventory growth means factories likely produced less.

Heavy equipment maker Caterpillar, Inc. said this week that it reduced its inventories by $2 billion in the fourth quarter as global sales declined from a year earlier.

The biggest question going forward is how consumers react to the expiration of a Social Security tax cut. Congress and the White House allowed the temporary tax cut to expire in January, but reached a deal to keep income taxes from rising on most Americans.

The tax increase will lower take home pay this year by about 2 percent. That means a household earning $50,000 a year will have about $1,000 less to spend. A household with two high-paid workers will have up to $4,500 less.

Already, a key measure of consumer confidence plummeted this month after Americans noticed the reduction in their paychecks, the Conference Board reported Tuesday.

Economists expected the first reading on gross domestic product to show growth of 1 percent, down from the third quarter’s reading of 3.1 percent. – AP