Looking around the globe

The European Central Bank (ECB) has held rates steady at 2 percent while Japan has had a zero interest-rate policy since 2001. For investors chasing yield, the shift to the U.S. dollar was a no-brainer and helped propel the greenback to two year highs. The Euro was around $1.16 in mid-November. The dollar has also rallied to its highest level in 27 months vs. the yen, around 118.91.

Some analysts are predicting the hike-fueled dollar rally may be nearing its end, however.

“We are in the later innings of the tightening cycle, compared to the Europeans and the Japanese,” says Jim Glassman, senior economist at J.P. Morgan Chase.

Many economists agree the Fed’s current tightening cycle may come to an end early in 2006. Most market watchers believe the Fed will kick up the funds rate by another 25 basis points at each of the next two meetings on Dec. 13 and Jan. 31. That would leave the rate at 4.50 percent. From there, however, many speculate the Fed’s tightening cycle may be over.

A wildcard will be incoming Fed Chairman Ben Bernanke, who is expected to take office in early February. Paul Kasriel, director of economic research at Northern Trust Company, calls the new chairman “a complicating factor” in forecasting the funds-rate outlook.

“There is some feeling that he might have to push things a little higher to earn the respect of the markets,” Kasriel says. He notes the markets have currently priced in shortterm rates to about 4.75 percent.

Regardless, most analysts expect the Fed to stop hiking by the spring of 2006 when rates are between 4.5 or 5 percent.