US officials are out in force Tuesday morning talking up the dollar and attempting to restore some stability in the financial markets. With US Treasury Secretary Paulson saying that “a strong dollar is really very important” and Fed President Plosser calling for a rate hike before the economy turns around, it is not surprising to see the Euro below 1.59.
A strong dollar is important because it helps to reduce inflationary pressures. If oil falls back down to $100 a barrel, half of the Fed’s problems would be solved. Consumers would become more liberal with their spending while businesses would become more optimistic.
For companies like American Express (NYSE:AXP), more liberal consumer spending is exactly what they need. According to last night’s earnings report, the bank’s most affluent cardholders spent less on discretionary purchases in the second quarter. It seems that even their Black Card holders are cutting back, illustrating how widespread the pain in consumer sector has been.
Earnings from the banking sector continue to be weak with Wachvoia (NASDAQ:WB) reporting a record loss of $8.9 billion. In response, they have slashed their dividend and plan on laying off more than 5000 employees.
However will the Federal Reserve actually raise interest rates “sooner rather than later?” Probably not. The focus is on restoring financial market stability and helping the banking sector find their footing. A rate hike at this time or this year for the matter would be counterproductive.