fundamental alert

US Dollar Gains On Prospects For Second Stimulus Package

Monday, 20 October 2008 16:53:33 GMT  |  Terri Belkas, Currency Strategist

The US dollar has gained over the course of the early afternoon as Fed Chairman Bernanke supported the introduction of another fiscal stimulus package this year. Such a move would raise speculation that the proactive efforts by the US over the past year leaves them in a better position compared to regions like the Euro-zone and UK. Indeed, the Federal Reserve started aggressively cutting the fed funds rates last September, while the European Central Bank was increasing rates right up until July 2008 and didn't start reducing rates until the October 8 coordinated cuts. The Bank of England, on the other hand, cut rates by 75bps between December 2007 and April 2008, and participated in the coordinated effort as well. Nevertheless, the Bank Rate is still relatively restrictive for the UK economy at 4.50 percent, leaving the nation likely to tip into recession.

Source: Bloomberg


Nevertheless, it's worth wondering if it would be worth it for the government to try to create another stimulus package. The $168 billion plan only had a limited impact after it was enacted in February 2008, as one of the goals was to boost consumer spending. While US retail sales did manage to gain post-package in May 2008, consumption subsequently cooled during the following months as the combination of falling asset prices (homes, stocks, etc.) and the credit crunch prove to be too restrictive for consumers used to living off home equity loans and credit cards while deteriorating labor market conditions weighed heavily on consumer confidence. With these factors unlikely to improve dramatically anytime soon, another stimulus package that hands checks directly to Americans is unlikely to persuade them to spend. 

US Advance Retail Sales (Monthly Chart)

Source: Bloomberg

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