June 1, 2006
G10 Currencies
USD in a Holding Pattern Before a Soft Landing
Bottom line. Despite the risk reduction that has taken
place in various markets in recent weeks, there are still
substantial USD shorts in EUR/USD, GBP/USD and
USD/JPY. Inflation surprises could trigger short-term
rallies in the dollar. Having said this, I continue to
believe that, later this year, decelerating growth (not a
recession) should drive the dollar lower, particularly
against Asia.
Growth will drive the dollar lower.
We maintain our view that, when growth shows a definitive downtrend
toward potential later this year, the dollar will resume its
cyclical depreciation. But in the near term, inflation
could support the dollar.
The Fed will remain credible; inflation means a stronger dollar.
I still don’t buy the argument that the
Fed has fallen behind the curve and that the USD will
sell off no matter what happens to inflation. The 1994-
95 experience should be a lesson for the market, not
for the Fed. Upside surprises to inflation will lead to
further rate hikes and a stronger dollar, particularly
given the market positioning.
USD is still a safe haven currency.
The USD rally we’ve witnessed in recent weeks reaffirms our
structural view that the dollar’s hegemony is preserved,
and that it will remain a good safe-haven currency.
President Bush now has a ‘dream team’. I think
investors may run the risk of not taking the Bernanke-
Kohn-Paulson team seriously enough. I continue to
attach a close to 0% probability to the US adopting an
explicit weak dollar policy.
An inflection point for the US trade account.. The
US trade account may be turning, which is logical if the
rest of the world is indeed recovering.
Report by Stephen Jen, Morgan Stanley Global Research.
G10 Currencies
USD in a Holding Pattern Before a Soft Landing
Bottom line. Despite the risk reduction that has taken
place in various markets in recent weeks, there are still
substantial USD shorts in EUR/USD, GBP/USD and
USD/JPY. Inflation surprises could trigger short-term
rallies in the dollar. Having said this, I continue to
believe that, later this year, decelerating growth (not a
recession) should drive the dollar lower, particularly
against Asia.
Growth will drive the dollar lower.
We maintain our view that, when growth shows a definitive downtrend
toward potential later this year, the dollar will resume its
cyclical depreciation. But in the near term, inflation
could support the dollar.
The Fed will remain credible; inflation means a stronger dollar.
I still don’t buy the argument that the
Fed has fallen behind the curve and that the USD will
sell off no matter what happens to inflation. The 1994-
95 experience should be a lesson for the market, not
for the Fed. Upside surprises to inflation will lead to
further rate hikes and a stronger dollar, particularly
given the market positioning.
USD is still a safe haven currency.
The USD rally we’ve witnessed in recent weeks reaffirms our
structural view that the dollar’s hegemony is preserved,
and that it will remain a good safe-haven currency.
President Bush now has a ‘dream team’. I think
investors may run the risk of not taking the Bernanke-
Kohn-Paulson team seriously enough. I continue to
attach a close to 0% probability to the US adopting an
explicit weak dollar policy.
An inflection point for the US trade account.. The
US trade account may be turning, which is logical if the
rest of the world is indeed recovering.
Report by Stephen Jen, Morgan Stanley Global Research.