Back in August during the debate over Fed interest rate policy, one of the arguments against a Fed easing was that it would exacerbate the weakness in the US dollar if other countries either continued to raise interest rates or left them unchanged. Over the last several weeks, however, signs have been emerging that economic weakness may be spreading. This may cause central banks around the world to follow the lead of the US in their interest rate policy, focusing on economic weakness instead of rising inflation.
First, we saw the run on Northern Rock in the UK which signaled that mortgage issues may be hurting economic growth. Throughout Europe, we have also seen signs that economic growth may be slowing, as the number of economic reports coming in weaker than expected has increased. For example, Industrial Orders in the Euro Region showed a 4% decline (vs. estimates of a 3% decline) yesterday, and Germany's Business Confidence Index showed a larger than expected drop this morning. Even the World Bank is getting in on the act, as the agency is set to lower the interest rates it charges for the first time since 1998 ("World Bank Nears Rate Reduction" - WSJ).
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