This last year has seen the US Federal Reserve act to nudge interest rates up from 2.25% to 3.0% in three incremental stages, beginning in February 2004. There has been a limited response from equity markets, which had broadly anticipated the shift in policy from what were accepted as unsustainably low levels. However, despite a strong end to the first quarter of 2005, the second quarter has seen markets falter somewhat with growing signs that the global economy will struggle to sustain its current level of growth towards the year-end and into 2006. In Europe both the Bank of England and the European Central Bank (ECB) kept rates on hold at 4.75% and 2% respectively.In the Far East, some dollar sensitive markets have fallen, as rising US rates and a resurgent dollar pegged back competitiveness. Other markets not pegged to the Greenback (Korea, Indonesia) enjoyed good gains. In China, growth is slowing from the peak of 2004, but exports are still some 35% up year-on-year. Patience is running out with this powerhouse, and G8 calls for a float of its currency (upwards) to allow a narrowing of the trade imbalance, are becoming louder and more frequent.
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