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17 Dec 2009

Financial Markets

Fed More Optimistic about US Economy, Supporting US Dollar (Business Brief No.2714)

The US Federal Reserve (Fed), at their Federal Open Market Committee (FOMC) meeting, December 15-16, 2009, unanimously resolved to hold their Fed Funds rate in a range of 0.00-0.25 percent, as expected. In addition, purchases of agency debts and agency mortgage-backed securities (agency MBS) were kept intact at USD175 billion and USD1.25 trillion, respectively. Financial markets have focused on the Fed's post-meeting statement presenting an optimistic view toward the US economy and market health. It also mentioned that most of their special liquidity facilities and swap agreements with other central banks, would expire on February 1, 2010.
KASIKORN RESEARCH CENTER (KResearch) holds the view that the continued gradual exiting from the Fed's emergency actions has so far been consistent with central banks elsewhere. However, amid a fragile US economic rebound with excess production capacity and no inflation threat, the Fed statement is expected to continue to mention about the maintaining of low interest rates for the foreseeable future. Close attention should be paid to the sustainability of positive signs in US economic indicators, especially their labor, housing market and private spending figures. These data may reassure some about the Fed's more optimistic perspective toward the US economy in the post-FOMC meeting statements in 2010, which may imply the tightening bias in their monetary policy.
Even so, an upward trend in the US policy rate seems unlikely in 1H10. We may possibly see US rate hikes during 2H10 or in 2011. If the US economic recovery is firmer by then, adjustments in financial markets may be based on “economic fundamentals” rather than “investors' risk appetites”. This implies that the weakening US Dollar, plagued by numerous negative factors, might be marginalized by expectation toward Fed increases in interest rates. Meanwhile, financial markets – including those for commodities and stocks – may remain bullish in line with the global turnaround.

Amid a fragile economic environment, however, Thai policymakers may have to brace for unavoidable volatility, either in financial markets (especially the forex market) and capital movements. In addition, investors may have to keep a close watch on whether the Fed will continue their optimism toward the US economy, going forward. This factor may, from time to time, help boost the US Dollar against other currencies, including the Baht.

Financial Markets