FYI | Sep 25 2008
By Chris Shaw
With the US dollar being particularly volatile in recent weeks, Standard Chartered has taken the view the best way to look at where the greenback may trade is to divide the outlook into the short, medium and longer-term and to consider each timeframe separately.
Using such an approach, the group suggests the likely short-term trend is towards further weakness, as the rescue package by US authorities includes large US dollar swap lines with other banks and these will dampen US rates.
In contrast, the group has taken a bullish view on the dollar’s medium-term outlook as it suggests the multi-year fall in the currency has been overdone and the current undervaluation is now being rectified. As well, it suggests the current deleveraging of the global financial system and the deceleration in global money supply growth are conditions that typically are US dollar supportive and so favour further strength in the greenback.
But again Standard Chartered take a bearish view on the longer-term future for the currency as it seems to be in a secular downtrend thanks to the fiscal and current account deficits being run in the US and not enough in the way of potential asset market returns to allow the US to compete effectively for global investment capital.
This means either the currency must fall significantly, or US asset market yields must rise by enough to restore the balance of payments to a balanced position. With this unlikely to occur, the group sees more downside for the US dollar in coming years.
