Surge in US retail sales fuels large dollar gains: Delay in German rates cut feared as Bundesbank supports mark

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The Independent Online
SURGING retail sales yesterday brought confirmation that the already strong US economy is accelerating and lifted the dollar to its highest level in more than a year.

It rose nearly 2 pfennigs, prompting the Bundesbank to step into the foreign exchange market with light sales at about DM1.7435, despite figures showing that US inflation pressures remain subdued.

The Bundesbank action suggested that concern over the weakening mark may delay a cut in key German interest rates at next Thursday's central bank council meeting.

The dollar nevertheless breezed past its 1993 high-point of DM1.7488 to reach a peak of DM1.7530, before easing gently back to DM1.7510, a gain of 1.5 pfennigs on the day.

The Bundesbank's action prompted speculation that the central banks may become more active in the currency markets, especially if the US currency shows signs of pushing towards the DM1.80 level.

Although the dollar's latest display of strength may delay the next reduction in key German rates, some analysts argued that the mark was more likely to strengthen than weaken if the German central bank acted soon.

''The experience of 1993 shows that currencies are helped by a cut in rates because that improves the prospects for economic growth,' said David Cocker, of Chemical Bank.

The dollar's sudden advance came after US retail sales climbed 0.8 per cent in December, well ahead of market expectations. It was the ninth consecutive monthly rise and pushed up sales for 1993 as a whole by 6.2 per cent, the sharpest annual gain since 1989.

On the basis of these figures, analysts estimate that the US economy grew at an annual rate of 5 per cent in the fourth quarter, the fastest growth rate for a year. John LaWare, a governor of the Federal Reserve, the US central bank, said it was unlikely that this growth rate would be sustained. He predicted expansion would subside to an annual rate of 3-3.5 per cent.

After figures showing the consumer price index rose a modest 0.2 per cent in December, Mr LaWare said the inflation outlook was favourable.

The latest rise in the CPI left the annual rate for 1993 at 2.7 per cent, down from 2.9 per cent the previous year. Figures earlier this week showed US wholesale prices were virtually flat in December.

The Fed governor said that as long as the annual growth rate eased below 5 per cent in the first quarter 'I don't think there is any great pressure for a drastic change in monetary policy'.

Financial markets are becoming increasingly nervous at the prospect of a rise in key US interest rates, a development that would strengthen the dollar even further. But yesterday's figures and Mr LaWare's comments provided little ammunition for these fears.

Economists believe US tax increases are likely to hold back economic growth later in the year. Some also point to the uneven composition of the sales figures as evidence the expansion may ease later.

The rise in December partly reflected revisions to November sales, up 0.3 per cent. Sales in both months were llifted largely by higher demand for cars, which have enjoyed a remarkable revival owing to pent-up replacement demand delayed by the 1991 recession. Sales of building materials also increased but sales by merchandise and clothing stores both fell, unusually for the Christmas season.

The Bank of England yesterday provided fresh evidence that retail sales remain buoyant in Britain. It said the value of banknotes in circulation last week was 6.5 per cent up on the same week last year. The annual increase in the previous week was 8.6 per cent.

Economists at Midland Bank said an increase of 5.8 per cent would have left the level of notes consistent with the average for the last 15 years, suggesting that consumer spending is holding up well compared with last year.

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