U.S. economic analysis – week of July 18, 2005

U.S. economic analysis – week of July 18, 2005

There was no bigger news this week on the economic front than China’s decision to remove the peg from its currency. But that was not the only thing that would exact a heavy toll on Wall Street. The combined effect of Beijing’s announcement and another series of apparent terrorist attacks on the London transportation system almost immediately brought all the major US stock indices down. Combined, the Dow Jones, Standard & Poor’s 500, and Nasdaq composite lost an average of 0.6 percent to their respective totals. China’s decided early Thursday morning to remove the yuan’s peg against the dollar and instead place it against a basket of currencies. Now the yuan will be compared to a group of currencies and allowed to move 0.3 percent up or down from the previous day’s state-set price. The long-term consequences of this decision mean that the yuan could eventually rise or fall. The possible varied effects of this decision are many but at least at the outset it appears to have taken a toll primarily on US investors and Chinese exporters who, after the yuan rose yesterday, will now pay more to sell their goods abroad. There was also the issue of a series of unsuccessful attacks on the London underground this past Thursday (July 21). Though the bombs failed to detonate and no one was hurt, they nevertheless went far to unsettle investors. In other news, oil gained $0.82 to bring the cost of a barrel of light sweet crude to nearly $58. Jobless claims were their lowest since April when they unexpectedly dropped 34’000 to 303’000 for the week ended July 16. Mortgage rates climbed for the third straight week to 5.73 percent but still remain around the low rates seen in June 2003. Meanwhile steel shares showed a little life after Smith Barney noted that the industry may be headed for a rebound. The nation’s number one and two steelmakers, US Steel Corp. and Nucor Corp. both noted modest gains at 3.4 percent and 2 percent, respectively. In the end though China’s move away from loosening its currency should be an obvious positive sign for the US economy which will be able to shift its trade balance to more exports and less imports. At the very least, it gives the Bush Administration some breathing room from an angry Congress that has been calling for reigning in China.