MercoPress. South Atlantic News Agency

Markets speculate with “pause” in Fed's interest hike

Currency markets are speculating that the US Federal Reserve would bring a pause to its cycle of interest rate hikes next week following the Friday release of July employment figures showing a considerable growth slow in jobs creation and earlier information of a cooling of the US economy.

United States GDP grew at an annual rate of 2.5% in the three months to the end of June, compared to 5.6% in the previous quarter.

The Fed's pause is forecasted even when last Thursday the European Central Bank decided to hike its basic rate to 3% and the Bank of England unleashed a surprise hike in interest rates to 4.75%.

The greenback plummeted to 1.29 to the Euro and 1.90 to the UK pound before experiencing a slight recovery. Some traders said the US dollar could weaken further still, especially if the US central bank suspends its rate hiking cycle which has lifted the fed funds rate to 5.25%. All eyes are now on the Fed ahead of Tuesday's meeting.

Carlos Gutierriez, the U.S. commerce secretary and former chief executive of Kellogg Company, says a slow down in growth balances the economy.

"You'll recall that in the first quarter (of the year) we had 5.6% economic growth" he noted. "Unsustainable; very high, I think it made a lot of people wonder. It made many people become concerned about whether the economy was heating up. That [growth] has slowed down to 2.5% in the second quarter. What you have now is a pretty good average for the year."

Last Thursday the European Central Bank said it had room to raise rates as recent surveys had shown rising optimism among European companies. With inflation in the eurozone at 2.5% over the past three months, well above the bank's 2% target, most analysts had predicted Thursday's rise.

The rise is the fourth such increase in eight months as the ECB tries to curb inflation and is a tendency witnessed in some major economies.

In the US, the Federal Reserve has raised rates on 17 consecutive occasions to 5.25%. Japan, which has had near-zero interest rates, saw its central bank make its first increase in rates in six years last month. Earlier in the week, Australia increased its rates to 6%.

At his press conference following the decision to increase rates, ECB President Jean-Claude Trichet seemed to suggest that more rises might be necessary.

With eurozone inflation likely to remain above 2% into 2007 he said the ECB will "continue to monitor very closely all developments to ensure price stability over the medium to longer term".

Eurozone interest rates are expected to hit 3.25% or even 3.5% by the end of this year.