Investors expect that the recent efforts by the U.S. Federal Reserve to clean the market from some toxic assets could lead to a more general recover in the appetite for risky assets like high yielding currencies. However, the U.S. economy is likely to continue to face substantial challenges including further job losses, high energy prices and a rapid deleveraging in the financial sector. Moreover, some investors are concerned with the fiscal impact of the bailout plan which could cost almost 5 percent of GDP. Currently, the United States federal government runs a deficit of $438bn, or 3 per cent of gross domestic product and the bailout costs could push the fiscal deficit next year to $1 trillion or 7% of GDP. Having said that and given the current market environment of uncertainty and de-leveraging in financial markets, the U.S. dollar is likely to remain vulnerable against lower yielding currencies like the Japanese yen but the greenback is likely to appreciate against high yielding currencies like the Australian dollar, the kiwi and even the euro.
Antonio Sousa, Chief Strategist Questions? Comments? E-mail: asousa@fxcm.com