Analysts are split almost evenly on the most likely scenario but they are unanimous on the catalyst for change and all eyes are focussed intently and directly on the US economy. The main problem is that, whilst Uncle Sam’s spending capacity is the key to further economic growth, two years of interest rate hikes are having an effect on the retail habits of American consumers. 

A quick round robin of the statistics will paint the picture (I know stats are boring but stay with me and you’ll see why they are important in this context). US existing home sales are sliding; we started the year with an annual sales level of 6.75 million properties but this had fallen to just 6.3 million by August. However, at the start of the year, the average US house price was $211,000 and this had grown to $225,000 by august. New home sales offer a similarly confusing picture. If you believe the pundits, things are tight in this market and yet we started the year with annual growth of 2.91% but this was up to 4.1% by August. 

So the housing market doesn’t give any obvious signals of a huge slowdown in the US; perhaps retail spending is a clearer indicator. Well no; certainly the rapid rise of oil prices caused some rumblings and the doom-mongers were tolling the death knell for gas guzzlers and their drivers but, after a slight correction in crude oil prices, the August consumer confidence index was up 104.5; one of the best levels seen in 2006. And with inflation pushing along at a fair clip, there appears to be little wrong with the US public’s appetite for consumer goods.

What has changed though is the manufacturing sector with durable goods orders sliding for two consecutive months in July and August. That in turn has contributed to a slide in economic growth (GDP) from 5.6% in the last quarter of the 2005 to just 2.6% in Quarter two of 2006.  That is a definite concern for the US Federal Reserve which is starting to see their rapid hike in interest rates (from 1.0% to 5.25% in just two years) depressing the expectations of businesses and consumers alike. The decline on 

That is a brief explanation of the background to the US Dollar’s quandary and, so dependent is the global economy on US consumers that, this confusion is creating all manner of volatility in other exchange rates.

Sterling against the US Dollar is still remarkably strong. The complications on the Western side of the Atlantic are enough to contend with without the mixed signals being emitted by members of the Bank of England’s monetary policy committee. On the day of writing this report we have seen entirely opposing views from David Blanch flower and Sir John Gieves which leaves traders with as many arguments for interest rate hikes in the UK and there are for rate cuts. 

Mind you, if the BOE isn’t opaque enough for you, there are equally conflicting signals elsewhere with inflation above the BOE target but retail spending yo-yoing month on month. Manufacturing is under pressure but the housing market is ramping away; wage growth is running at a sustainable pace but consumer credit is running at twice the rate of anywhere else in Europe. Add the argument over who will be the next Prime Minister and the recipe for volatility is almost complete.

And if all of that isn’t confusing enough with just the four components of the United Kingdom, just image how irrational some of the decisions of the European Central Bank must look to the twelve Euro member states and the twenty odd nations whose currencies are closely aligned with the Euro. 

The ECB is expected to raise the base interest rate in Europe at least one more time before the end of 2006. That in itself ought to strengthen the Euro but the Euro can’t make headway against the US Dollar and any attempt by traders to push Euro-US Dollar rate above $1.29 is thwarted by the wave of USD buying that ensues. Traders are happy with the level of interest rates in Europe, fairly happy with the level of manufacturing output and relatively satisfied with the gentle downward direction of unemployment across the Eurozone. 

However, Europe exports a large part of its output to the US and any slowdown in spending by US consumers threatens BMW, VW and Mercedes as well as wine producers and luxury goods manufacturers plus many other businesses which rely on the US market for growth. 

So despite all manner of anti-US rhetoric, almost every country around the globe should be rooting for a revival in the US economy because; whilst I haven’t covered them here, the Chinese, Japanese, Indian and Middle Eastern economies all rely in some degree on the performance of the US consumer.  Without that bulk of spending power, Chinese exports would lag, demand for Japanese electrical goods would decline and OPEC would find itself having to cut production in order to maintain current oil prices.