The dollar’s general weakness in the first trading days of the year suggests that investors, collectively, are not yet fearful enough for the ‘Dollar Smile’ to work. Specifically, this descent in the dollar implies a general presumption that the US – being the epicentre of the current global slowdown – will suffer the most and that the rest of the world (RoW) will be relatively unhurt from such a slowdown in the US. In addition to this geographical dichotomy, risky assets may need to fall much more for fear to become the main driver of investment. We believe that the ‘Dollar Smile’ will eventually start to work, when the RoW starts to slow, with a delay.
by Stephen Roach, Head Economist, Morgan Stanley
Weekly Bank Research Center 01-21-08
Dollar to Rally this Year against the Euro and British Pound
Stephen Roach, Head Economist, Morgan Stanley
The dollar’s general weakness in the first trading days of the year suggests that investors, collectively, are not yet fearful enough for the ‘Dollar Smile’ to work. Specifically, this descent in the dollar implies a general presumption that the US – being the epicentre of the current global slowdown – will suffer the most and that the rest of the world (RoW) will be relatively unhurt from such a slowdown in the US. In addition to this geographical dichotomy, risky assets may need to fall much more for fear to become the main driver of investment. We believe that the ‘Dollar Smile’ will eventually start to work, when the RoW starts to slow, with a delay.
Australian Dollar Overvalued: Correction Looms
Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
AUD is highly overvalued compared to levels implied by long-run equilibrium and will have to see a significant correction. When this correction will take place, however, and how gradual it will be, is uncertain. While relative growth and interest rates remain favourable, three factors will weigh on AUD in 2008, as global growth slows, commodity prices peak, and global risk aversion remains high or rise. We will therefore consider going short AUD when we see one of these triggers.
Fed Chairman Bernanke endorses a fiscal stimulus package, stock markets fall anyway
Steve Chan, Economist, TD Bank Financial Group
With all the talk of a U.S. recession flooding the news waves the past few weeks, all ears were on Fed Chairman Ben Bernanke’s testimony to the House Budget Committee this Thursday. For the most part, Bernanke’s comments mirrored the message he delivered in a speech last Friday, namely that “the downside risks to growth have become more pronounced” and the Fed “stand[s] ready to take substantive additional action…to support growth.” What was new (at least to observers outside of recent closed door meetings on Capital Hill) was his qualified endorsement of a fiscal stimulus package to support economic growth in the next year.
US Economy Has a Severe Cold; Can Legislators Find the Cure?
John E. Silvia, Ph.D. Chief Economist, Wachovia
Some parents cosset their children so much that they get themselves excited every time their children get the sniffles. While we do not want to minimize the challenges currently facing the U.S. economy, we do not want to exaggerate them either. The U.S. economy has the equivalent of a severe cold and if policymakers do not take care of things it could develop into something far worse. If policymakers do the right things, however, the economy could bounce back just as quickly as most children do, leaving us all wondering why we were so worried. The first twelve trading days of 2008 have been horrendous, with all the major stock indices tumbling. Investors are worried about the economy and near term outlook.
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