Despite the strength of the peso over the last few weeks, our currency view also remains unaltered. However, the Swiss authorities decided not to raise the discount rate at today's monetary meeting. Mr Meyer, the new chairman of the SNB board who replaced Lusser last month, is a strict monetarist, having been with the Bank for 30 years. He will not want to take any risks over inflation. With German repo rates expected to fall in the near term, an increase in interest rates appears premature.
Inflation is under control.
While we admit it is a case of when, rather than if, the discount rate will be raised, we do not expect the move to come until later in the year, probably the fourth quarter. At this stage we would view the gyrations in the dollar yesterday as nothing more than technical - sterling was the culprit, with a large sterling buy order disturbing the equilibrium of the market. DM2.40 now looks easy, and we all know that currencies overshoot. On the US, as we have noted before, the volatility in financial markets that results when market expectations of Fed policy adjust is not a great environment for the dollar. However, the end result is positive - wider interest rate differentials between the US and the rest of the world, i.e., more of an interest rate bribe for what has been a terminally declining currency.