International | May 17 2006
By Chris Shaw (Tokyo)
It is no secret the US dollar has come under pressure in recent weeks, leading Danske Bank to offere several underlying themes to help explain the current weakness.
Danske Bank suggests there is the structural issue of imbalances in the global economy, which will require a weaker US dollar and correspondingly stronger Asian currencies to address.
There is also the cyclical factor given the Federal Reserve appears to be ready to pause in terms of official interest rates while at the same time rates are moving or are likely to move higher in Europe and Japan. As the bank notes, the resulting changes to interest rates differentials mean money is now being attracted to different markets.
Finally, it suggests current political issues are not helping, as with uncertainty the dominant feeling in terms of global affairs and potential outcomes investors are looking at investment alternatives to the US dollar, one of these being gold.
Another key to the recent weakness in the bank’s view is equally important but not yet clear, this being the approach of the Federal Reserve with respect to inflation. It points out if the Fed is now targeting inflation specifically rather than just being aware of it as it attempts to maintain a solid rate of economic growth there could be far more to come in terms of interest rate moves, which should prove supportive for the greenback.
The bank also makes the point if the US dollar is to decline as the global imbalances suggest it must, another currency must go up in response. While the Chinese currency is most favoured to adopt that role, but if this is to occur the Chinese government must be willing to allow its currency to strengthen. Similarly, if the Chinese give the impression of resisting the Japanese are likely to follow suit in the bank’s view, so the current expectations for currencies would most likely prove to be off the mark.
The attitude of the Japanese will therefore be a key as they have hinted they are not so happy with the current pace of appreciation of the yen. Danske Bank suggests the yen is clearly undervalued though, so it could rise without impacting negatively on the economic recovery currently underway in that economy.
Joseph Carson, economist and director of global economic research at Alliance Bernstein, takes the view the US dollar has substantially more left to fall, estimating it could decline another 10-20% in coming years as it responds to the current account deficits the US is currently reporting.
While such a move is likely to be lengthy given the size of the imbalance to be overcome, Carson suggests a shift by foreign investors away from US dollar assets and into other asset classes would speed up the pace of change.
Similarly Danske Bank suggests the adjustments are far from finished, forecasting the dollar will fall as low as 136 against the euro and 102 against the yen.
Short-term direction is likely to remain volatile though, with ICICI Bank cautioning investors to take a cautious stance in the short-term given the pace of recent moves in the currency markets.
ANZ Bank suggests the fact economic data is currently mixed means perceptions of whether or not the Fed will continue to lift rates or pause for a few months will be the driving force in the medium-term, ICICI Bank retaining its positive stance towards the Asian currencies in the medium-term.
