guest commentary

2009 Dollar Outlook

Monday, 22 December 2008 12:12:55 GMT  |  David Song, Currency Analyst, Geng Chen, DailyFX Research

In 2009, assuming that the global economy finds a trough by summer, we see the dollar rallying further into the trough, but underperforming most other currencies as the world recovers in 2H. The swings in the global business cycle will likely be the dominant driver for the dollar. Other factors such as US government debt sustainability and the US inflation outlook associated with the Fed’s QE (quantitative easing) operations will likely be secondary considerations, mainly because we believe that US Treasuries will remain well-supported and a flare-up in inflation is not a probable risk.

Weekly Bank Research Center 12-22-08

 

2009 Dollar Outlook

Stephen Roach, Head Economist, Morgan Stanley

In 2009, assuming that the global economy finds a trough by summer, we see the dollar rallying further into the trough, but underperforming most other currencies as the world recovers in 2H. The swings in the global business cycle will likely be the dominant driver for the dollar. Other factors such as US government debt sustainability and the US inflation outlook associated with the Fed’s QE (quantitative easing) operations will likely be secondary considerations, mainly because we believe that US Treasuries will remain well-supported and a flare-up in inflation is not a probable risk. There is no official change to our forecast and we continue to look for EUR/USD to dip to 1.10 by 2Q, before recovering to 1.20 by end-2009. USD/JPY will likely exhibit a similar U-shaped trajectory, dropping to 85 by 2Q before rising to 100 by end-2009. Most EM currencies will likely experience intense depreciation pressures vis-à-vis the USD in 1H. Differentiation at the EM country level will likely be unproductive in the sell-off phase. But in the recovery phase, country-specific factors will likely drive a wedge between the currencies of the 'good' from the 'bad' economies.

 

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Zero Interest Rate Policy

Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank

The Federal Reserve decided at its meeting on Tuesday to lower the fed funds rate to a target range of 0-0.25%, which is the closest we will get to a zero interest rate. But the message in the FOMC's statement was clear: although there is nothing more that can be done via policy rates, the potential for further easing of monetary policy is far from exhausted. In the statement, the Fed more or less committed itself to keep the fed funds rate "exceptionally low" for some time, and we expect it to leave it unchanged throughout 2009. With the monetary policy rate effectively out of play for many months to come, the focus now is on the alternative instruments that the Fed might use. So far it has largely followed the script from Ben Bernanke.s famous "helicopter speech" in 2002, and Tuesday's FOMC statement was no exception. Much of the statement was dedicated to outlining the measures that the Fed has already put into place, such as buying up MBSs and supporting the ABS market. Future quantitative easing of monetary policy may take the form of further purchases of MBSs and purchases of long-term Treasuries, but we also expect to see measures targeting specific credit markets in difficulty.

 

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Fed Policy As Base for Interest Rates

E. Silvia, Ph.D. Chief Economist, Wachovia

With easing of Fed policy this week, we witnessed a shift in interest rate expectations as well. First, as the FOMC lowered the funds rate target they also suggested that the "exceptionally low levels of the federal funds rate" will remain in place for "some time" given the "weak economic conditions." Our outlook is for the funds rate to remain at or below 25 basis points for all of 2009. We also expect that the three-month LIBOR rate will decline during next year to end the year at below one percent.In addition, the Fed held out hope at the longer end of the curve and for private market instruments. The Fed will "employ all available tools to promote the resumption of sustainable growth and to preserve price stability." Effectively, the Fed is committing to a continued expansion of its balance sheet to support financial markets and the U.S. economy. This balance sheet expansion will reflect Fed purchases of agency as well as mortgage-backed securities.

 

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Do You Fear What I Fear?

Steve Chan, Economist, TD Bank Financial Group

The unthinkable continues to become commonplace in the global economy these days. The White House has agreed to extend $13.4 billion in loans to GM and Chrysler. This has depleted the first $350bn in TARP funds so Treasury Secretary Paulson has asked Congress for the second half of the $700bn in funding. All told, it continues to look like the U.S. government is on pace to borrow over two trillion dollars this year. Well, add yet another log to the proverbial fire. The Federal Reserve this week lowered the fed funds rate to virtually zero – it will now trade in a range between 0.00% and 0.25%. This does not mean the Federal Reserve has run out of tools to manage the economy, but it does mean their traditional tool will not help them going forward. They must find innovative, and in many cases untested, ways to get lending flowing through the U.S. economy. This has included the introduction of numerous acronyms as the Fed tries to target the problems market by market. However, one of the Fed’s most important tools remains its words. We discussed in November the likelihood that the Fed would soon turn to bringing down long-term interest rates as the fed funds rates was quickly reaching zero. The Fed statement this week and Bernanke and other Fed speeches this month has reiterated this, sending Treasury yields and mortgage rates plummeting.

 

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Money Supply Growth - Is It Signalling Bad News or Good?

Trevor Williams, Chief Economist at Lloyds TSB Financial Markets

With the release of the latest UK monetary statistics this week, the spotlight should shine on what has been happening to money supply since the credit crisis broke in the summer of 2007. If the economic slowdown is going to be exacerbated by the credit crisis, then this is where the bad news should be evident. On the surface, there does not appear to be a problem at all with credit growth. UK money supply expanded by 15.3% in the year to October 2008, up from a rise of 12.4% in December 2007 and 10.1% in May this year. But this aggregate figure is very misleading. If the activities of other financial institutions (OFIs) are excluded, a completely different profile is revealed. On this adjusted basis, money supply rose by just 3.5% in the year to October 2008, down from 8.9% in December 2007 and 6.6% in May,

 

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Compiled by: David Song, Currency Analyst and Geng Chen, Dailyfx.com

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