Forex Sept 11, 2005

Consumer sentiment and retail sales numbers will not be as far down as might be expected, strengthening the dollar. Giving to Katrina victims and back to school purchasing will fuel steady to good numbers. Long term, these positives are likely to result in an underestimation of the effects of Katrina. Without Bush telling consumers to buy and without the defiant attitude that was key to continued consumer spending following 9/11, retail sales are likely to slow during the fall. Expect gradual erosion in consumer confidence once the natural we-will-bounce-back knee-jerk reaction to Katrina wears off. As for monetary policy, current expectations of continued rate increases by the Fed are likely correct. The inflationary pressure of Katrina related spending and higher oil prices gradually spreading through the economy will encourage Fed increases. In addition, it must be remembered that Greenspan considers the Fed’s primary role to be inflation prevention not maintaining economic growth. As he prepares to leave office he will feel compelled to continue raising rates, realizing that if he stops raising rates his replacement will be in a difficult position where he (or she?) would face political pressure against renewed rate increases.