General | Feb 04 2006
One trading strategy to meet with limited success in the past few years has been betting on a weaker greenback in the face of the US’s ever-expanding balance of payments and budget deficits.
While the US currency has been able to shake off the bad news until now, DBS Group suggests the future may tell a different story. It basis its view on the fact markets around the world are moving to end a lengthy period of loose monetary policy, with US and European rates having risen recently and Japan believed to be close to commencing a tightening cycle.
DBS believes the US is now close to the end of its tightening cycle, meaning there will be fewer stimulatory factors for its currency as increases in interest rates in other countries will reduce the attractiveness of holding US dollar assets.
The group notes a perfect example of this trend is the fact the amount of net assets in the US the Japanese are buying is now less than the US trade deficit with Japan, which is bullish for the yen and bearish for the US dollar.
At the same time, the US is being forced to deal with a stronger regional economy in Asia, which is being driven by Japan’s apparent emergence from recession and China’s continued strong economic growth.
This regional growth will, in the group’s view, make Asian currencies more attractive, particularly as countries in the region shift their growth focus to domestic drivers such as consumption and investment rather than relying simply on exports.
At the same time the US will be pushing for stronger regional currencies to assist it in improving its terms of trade, meaning there is unlikely to be a repeat of the case a couple of years ago when the Japanese were very active in attempting to keep their currency weak against the US dollar to boost exports.
Along with the likelihood of continued pressure on the Chinese to revalue their currency, DBS suggests the most likely outcome is a weaker US dollar going forward.
The group’s forecasts reflect this, DBS expecting the USD rate to move from about 118 currently to around 113 by the end of the year and 106 by June next year. The outlook for the Renminbi or Yuan is similar, with DBS forecasting a move from about 8.02 now to 7.84 by the end of December and 7.70 by next June.
